Cordiant and Bates reach a crossroads

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This could be Cordiant Communications Group's make or break year.

When Cordiant spun off from Saatchi & Saatchi in 1997, CEO Michael Bungey promised the move would free flagship Bates Worldwide to win major new business around the world by eliminating conflict issues with clients such as Saatchi's Procter & Gamble Co. Almost five years later, Bates has fewer international accounts than just about any network.

Cordiant's largest global client, Hyundai, worth $32 million in annual revenue, pulled the biggest portion of its car account Jan. 27 when it moved U.S. media to Aegis Group's Carat and put U.S. creative in review (AA, Jan. 28). The Hyundai loss comes despite Bates' painstaking effort to build relationships in half a dozen key countries. Bates even paid $100 million in 1999 for an 80% stake in Hyundai's Korean shop, Diamond Ad, and a five-year guarantee the account would stay put in Seoul.

Hyundai's U.S. media was handled through Bates Media, a unit likely to become part of Zenith Optimedia Group, according to two executives familiar with the arrangement. That move was in the works, but the loss of Hyundai removed a conflict with Zenith's Toyota Motor Corp. account. Bill Whitehead, CEO of Bates North America, strongly denied Bates Media would be incorporated into the media holding company, owned 75% by Publicis Groupe and 25% by Cordiant.

It's not clear whether Carat will pursue international Hyundai work. A Carat insider said Carat probably could work around a potential conflict with European Renault business.

On March 15, after Cordiant renegotiates bank covenants this month to avoid triggering higher interest payments on company debt, Mr. Bungey must announce dire 2001 financial results, including a widely signaled 9% drop in revenue that prompted 1,100 layoffs.

`back on track'

"I think we took corrective action and are now back on track," Mr. Bungey said. "We're budgeting for [1% to 2%] negative growth [in 2002], but margins and profit significantly enhanced."

On the plus side, Bates is a finalist in the White House Office of National Drug Control Policy review and a likely contender for Reckitt Benckiser's $300 million global business. With less Hyundai business, Cordiant's biggest global client is British American Tobacco; Pfizer tops the U.S.

"As a major shareholder of Cordiant, I will say we still have faith in Michael Bungey," said David Herro, director of international equities at Harris Associates, Chicago. "Fundamentally, Cordiant is strong and is one of the only, if not the only, independent advertising groups left. This is in itself a unique selling proposition to its clients."

A perennial takeover candidate despite Mr. Bungey's denials, Cordiant's most valuable assets are Bates, valued by analysts at about $460 million, equal to Cordiant's current market capitalization, and its 25% stake in Zenith Optimedia, priced at $100 million if Cordiant exercises a put option.

Cordiant shares fell 17.9% last week, closing in New York at $5.83, down from above $30 in 2000 and back to where it traded in 1997.

contributing: mercedes m. cardona and richard linnett

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