Facing an uncertain future

Earlier this month Aegis Group’s new boss John Napier gave a clear signal of his intentions by letting it be known that Merrill Lynch had been appointed to conduct a strategic review. In City speak, the announcement of a “strategic review” frequently means that approaches will be welcomed from anyone interested in buying part or all of the main group.

From the same dictionary of City speak it would not be unusual to expect lots of talk about “shareholder value” and about Napier’s laudable determination to enhance it. Translated into day-to-day English, that will mean taking action to create some chunky gains for all those City investment institutions that are wondering whether their funds will ever enjoy growth again.

The prospect of enhanced shareholder value, when taken with speculation about some or all of the group being for sale, would have the beneficial effect of keeping investors happy while also boosting the com-pany’s share price. Maybe this helps explain the 78% increase in share price since Napier took the helm at the end of November.

Sadly, the concept of enhancing shareholder value rarely means building a market-leading business that will earn consistently good returns for its investors over the longer term, such as in the form of steadily growing dividends.

If the long term is not in Napier’s sights, his main options would be to sell off the poorer performing of the two divisions – research operation Synovate – and then to find a buyer for the rump Aegis Media business. Few people would consider the cur-rent climate ideal for any such deals, but that’s no reason for not putting out feelers.

As first reported some years ago in Marketing Services Financial Intelligence, Aegis has spent a vast amount of money buying and building Synovate to provide a second string to its strategic bow. A recent estimate put the cost of that investment at near £500m. The aim, initiated by the then chief executive Crispin Davis and followed through by his successor Doug Flynn, appeared to be to reduce the group’s dependence on media buying alone and that at least has been achieved.

In recent years, under Robert Lerwill’s direction, much was done to pull the collection of research businesses together and develop products that could be marketed internationally. But margins in research are notoriously poor when compared with the advertising and marketing sector as a whole and Synovate has been no exception. Only WPP Group seems to have any strong attraction to the research sector and it is too soon to see if Kantar divisional boss Eric Salama can achieve the performance miracle that has eluded so many others.

All of this suggests that Aegis is unlikely to make a pile by selling Synovate. Doubt-less in the present climate it is prepared to take its time while Merrill Lynch explores opportunities and looks for ways to package the business as appetisingly as possible.

The best it could hope for is to get out of the research sector at a fair price and thereby improve the return on capital earned from the rump of the group it retains. That might enhance the market value of the rump – particularly if it can be shown that the diverse collection of digital businesses acquired under the Isobar umbrella offers the prospect of improved growth and profits in the future. But it’s still hard to see how companies like Havas could finance an Aegis acquisition at a price that would bring a smile to City investors’ faces without also creating a balance sheet burden for Vincent Bolloré.

The other dilemma facing the media division is its relationship with Isobar. Without a strong digital component, Aegis Media is likely to become a declining asset. But Isobar is not a pure media business and could have more appeal as a standalone entity. No doubt Merrill Lynch will have an answer to that conundrum.

All the signs are that Napier’s main focus will be financial, with the aim of creating so-called shareholder value within the next few years so that he can ride off into the sunset with another company “sorted”. What might happen to the businesses them-selves thereafter will have little relevance. Investors will have gained their desired spoils and the future will be left to look after itself… again.