For Cordiant, it's lonely in the middle

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Cordiant Communications Group has gone from the agency most likely to be voted off the island to a survivor-for now. When the London-based parent of Bates Worldwide reports its half-year results today, it will have little company among midtier agency conglomerates.

With the June acquisition of True North Communications by Interpublic Group of Cos. and last year's acquisition of former Cordiant sibling Saatchi & Saatchi by Publicis Groupe, Cordiant and Grey Global Group are the only major midsize global holding companies left. The two are also the only single-network holding companies remaining. With about $800 million in market capitalization to Grey's $715 million last week, Cordiant would be a somewhat bigger fish to fry.

Cordiant officials were not available for comment, but a London-based financial insider close to the company noted it's ironic Cordiant remains independent while its former sibling, Saatchi, was acquired by Publicis. Cordiant referred calls to Arthur D'Angelo, finance director, who was traveling and could not be reached.

`POOR RELATION'

Cordiant Communications Group and Saatchi & Saatchi-both formerly part of Cordiant PLC-became separate companies after a December 1997 "demerger."

"Cordiant was seen as the poor relation of the group," said the London insider, who has advised Cordiant and wanted to remain anonymous. After Bates lost marquee clients in the '90s such as Colgate-Palmolive Co., M&M/Mars and Philip Morris Cos.' Miller Brewing Co. due to conflicts with Saatchi clients, observers didn't hold much hope for the newly independent Cordiant.

The equity of the former Cordiant PLC was split Dec. 15, 1997, between Saatchi shares and Cordiant shares, both traded in London and, through American depositary receipts, on the New York Stock Exchange. The two companies started trading on the London Stock Exchange at 1.10 pounds a share, worth $1.79 at that time. ADRs of both companies debuted at $9.25 per share.

In the three years since the split, Cordiant's ADRs went as high as $31.13 per share in the U.S. market in March 2000 when speculation heated up that a takeover was imminent.

Tom Deitz, the London-based analyst covering Cordiant at Merrill Lynch & Co., noted the London shares have lagged the Financial Times Stock Index by 36.6% in the last year but have recovered in the last month to beat the index by single-digit percentages.

To be sure, Cordiant is hardly a hot stock. Amid the advertising slump, the stock has slid down to its 1999 level, giving back all the speculative gains of 2000.

The stock traded in London late last week at a 52-week low of $2.13 a share. ADRs traded in the U.S. late last week at a year low of $11, about a third of their 2000 peak.

And what of former sibling Saatchi? In June 2000, France's Publicis acquired Saatchi in a stock swap worth $7.57 per London share. That same day, Cordiant closed at $5.06 in London.

"I wouldn't say Publicis overpaid, but it was still at the peak of the market. From that point of view, Saatchi shareholders got a good deal," Mr. Deitz said. Following the advertising and stock market tumbles, Publicis, like Cordiant, is back to 1999 prices.

Publicis and Cordiant are partners in Zenith Media, a global media buying shop. Last month, they agreed to combine Zenith with Publicis' Optimedia to create an independent media company that will be 75% owned by Publicis and 25% by Cordiant.

At the time of the 1997 demerger, Bates was a comparatively weak, traditional advertising-dependent shop, said the London financial insider, but it has rebalanced its revenue mix through acquisitions and new business from drug giant Pfizer and Wella AG's hair-care products. Organic revenue growth has accelerated, margins have improved and it now has a more balanced marketing services offering as a group, thanks to acquisitions such as Lighthouse Global Network, a marketing services shop, and Healthworld Corp., a healthcare shop, he said.

Cordiant's revenue growth increased from 3.5% in 1997 to 8% in 1999 and 12.6% in 2000 and operating margins have increased from 7.8% in 1997 to 10% in 1999 and 12% in 2000. The 1999 figures make a more rational comparison, given the unusually strong activity in 2000.

ACQUISITION QUESTIONED

Merrill Lynch's Mr. Deitz agreed Cordiant has grown through acquisitions, but disagreed on the merits of Lighthouse, calling it an expensive acquisition of a low-quality property. He also noted Bates' strength in the depressed Asian markets, which account for 35% of Cordiant's operating profits, has hurt its performance and, combined with the weak U.S. economy, could hurt the second half.

Cordiant will report a slight increase in first-half revenue but flat revenue in the second half, leading to a 1% revenue increase this year, Mr. Deitz predicted. Cordiant's profits for the year will slump 11%, he said.

In an Aug. 2 note forecasting the first-half results, Mr. Deitz said export growth in South Korea-where Bates operates as a joint venture with its client Hyundai-has dropped to record lows, which could affect Hyundai's advertising budgets. The South Korean automaker accounts for 65% of Bates' revenue in South Korea and 7.5% of Cordiant worldwide revenue; the South Korean agency also contributes 4.5% of Cordiant's revenue.

In the short term, Cordiant appears to be safe from takeovers, Mr. Deitz said. The major holding companies are occupied with their previous acquisitions, such as Interpublic's integration of True North and WPP Group's continuing adjustment to Young & Rubicam. And with the weak market discouraging stock swaps, Cordiant appears to have won its independence by default-at least for the moment.

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