"Right now, the risk of its dividend going away is very real," said David Doft, advertising and marketing services analyst at CIBC World Markets, who sees "at least a 50/50 chance" Interpublic will cut or drop the payout.
The advertising conglomerate faces a deadline of Feb. 10 to settle with lenders on revised terms for borrowings. It agreed not to take any dividend action till then.
Interpublic is under pressure to reduce debt in the wake of accounting restatements, poor performance and an expanding Securities and Exchange Commission investigation. Standard & Poor's last week said it would decide in the "near term" whether to maintain the credit rating at just above junk. "There is no remaining cushion in the rating to withstand any negative news or disappointing earnings performance," S&P said.
Mr. Doft said Interpublic's expected sale of market researcher NFO WorldGroup (AA, Jan. 20) could bring $300 million to $500 million. But S&P analyst Alyse Michaelson warned: "Asset sales alone are not likely to provide sufficient liquidity for the rating to remain investment grade."
Interpublic could take other steps, such as refinancing debt, to improve liquidity. The dividend consumes $147 million a year, money that could be used to improve the balance sheet.
a cut likely
It's likely Interpublic will cut rather than kill the 9.5 cents quarterly dividend. Scrapping it-even as President Bush moves to make dividends tax free-would make Interpublic the only major agency company with no dividend and could draw more attention to liquidity issues. Some investors, such as value-oriented mutual funds, might not hold onto a stock without a dividend.
Owing to acquisitions, Interpublic's debt is four times what it was at the end of 1998. It's not alone; Omnicom Group's $2.5 billion debt and WPP Group's 1.9 billion pound ($3.1 billion) debt are each six times the year-end '98 level. Over the past year, Interpublic has paid down some of its debt while rivals' debts increased. But Interpublic's issues go beyond debt.
The formal SEC probe, which could go on for months, gives the SEC the right to subpoena executives and records. "In this environment, the SEC is being super, super aggressive," said Howard S. Meyers, a New York securities lawyer and accountant and a former attorney with the SEC's Enforcement Division.
Meanwhile, Interpublic continues a search for a chief operating officer to work under Chairman-CEO John J. Dooner Jr. "It's not an easy search," said one investment banker. "Anybody who would go into it would be potentially very concerned about their ability to make something happen. They're neither the CEO nor CFO."Various names are circulating as possible candidates, including Michael Dolan, chairman-CEO, WPP Group's Young & Rubicam and Y&R Advertising; Roger Haupt, former chairman-CEO, Bcom3 Group, and now president-chief operating officer, Publicis Groupe; Lewis Trencher, chief operating officer-chief financial officer, WPP's J. Walter Thompson Co.; and James J. Treacy, former president-chief operating officer, TMP Worldwide, and a former WPP financial executive.
People with knowledge of the matter said Mr. Treacy has met with Mr. Dooner. Mr. Treacy and a spokeswoman for Mr. Dolan declined to comment; the others hadn't returned calls at press time. Interpublic declined to discuss the search.
contributing: lisa sanders