Aegis' Future Uncertain Pending Planned Sale of Research Arm

Will Media Division Be a Standalone Business or Fall Prey to a Bigger Ad Group?

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As it prepares to sell off its market-research arm, Synovate, the future of Aegis Group is up for grabs.

Shares in the U.K.-based group have risen steadily this week as investors bet on the fortunes of the remaining assets of Aegis Group, which issued a statement yesterday confirming talks to sell Synovate to Ipsos, a market-research firm based in Paris. Synovate, with worldwide revenue of $885.4 million in 2010, accounts for 39.2% of Aegis Group's $2.26 billion in revenue. Aegis is the world's sixth-largesst advertising company, according to Ad Age 's DataCenter .

Without Synovate, the group will be left with the Aegis Media division, which is made up of media-buying networks Carat and Vizeum; digital network Isobar; out-of -home specialist Posterscope; and digital-search specialist iProspect. (In related news, Carat USA announced a management shakeup of its own today.)

All eyes are on Vincent Bollore, the French industrialist who is Aegis Group's largest shareholder, with a 26.5% stake. Mr. Bollore also owns 33% of French communications group Havas and is Havas' chairman. In the past, he has shown interest in buying Aegis and combining it with Havas' MPG media division to create a stronger global media-agency brand, but he has appeared to have lost interest in that idea.

Bob Willott, editor of Marketing Services Financial Intelligence, said, "Does he want Aegis? I'm sure he'd like Havas to have better global coverage, and for it to jump up the league tables and gain credibility -- it's seen as an also-ran and not quite up to snuff. But he's involved in a lot of other things, and he's not emotional about the communications business. He won't be prepared to pay silly money, and there will be a lot of other people after Aegis."

Citi Analysts predict that Publicis Groupe , Interpublic Group of Cos. and Omnicom Group could all be interested in Aegis Media, whose assets Citi rates as "high-quality," particularly as 32% of revenue comes from digital and 34% from faster-growing markets.

Catherine O' Neill, an analyst at Citi, noted that a move by Havas on Aegis Media would not make sense from a European perspective. "They would be overlapping on areas of strength -- particularly in Spain and France, where they are Nos. 1 and 2 in the markets -- rather than gaining additional scale where they are lacking."

However, Ms. O' Neill said that she could see the attraction of Aegis Media for Havas in Asia and in digital.

Aegis Media's revenue for 2010 was $1.37 billion, up 7.5% from 2009, while Synovate revenue was $885 million, up 9.8%. However, operating profit for the media arm was $255 million with a margin of 18.6%, whereas Synovate's profit was $71 million with a margin of just 8%.

Aegis Group is maintaining that it can stand alone without Synovate, and Mr. Willott agrees that it is a possibility. "By using the cash generated from a Synovate sale, Aegis could build its digital competence," he said, "and reinvent itself as a more broad-based marketing services group with digital at its core, that happens to have a strong media buying component".

Alex De Groote, a media analyst at Panmure Gordon, also sees potential for Aegis to continue without Synovate. "Why shouldn't it stand alone as a massive media business?" he asked. "It used to stand alone 10 years ago, and it's twice the size now. The Synovate sale would reduce net debt to zero, and I would expect Aegis to seek more exposure in the U.S. with the proceeds."

More potential buyers for Synovate could emerge to spark a bidding war now that discussions with Ipsos are out in the open.

WPP and Publicis have ruled themselves out of the race for Synovate, according to The Guardian newspaper, although Mr. De Groote said that news surprised him, given WPP CEO Martin Sorrell's enthusiasm for doing deals. "If you show him the cakes, he wants to stick his fingers in them and eat them," he said, "and WPP has a good balance sheet."

A potential bidder for Synovate is German market-research group GfK, which has acknowledged an interest in Synovate in the past. In 2009, a GfK spokesman said, "If Synovate comes up for sale we will take a look. We have authorized capital to spend."

Observers are valuing Synovate at between $654 million and $980 million. A median figure, $871 million, represents 0.85 times estimated sales for 2011, but Citi Analysts believe that one times sales would be more reasonable, given that Synovate has a strong presence in emerging markets.

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