GRAUNKE'S LATEST: HOLDING COMPANY FOR SPECIALTY SHOPS: ACQUISITION OF BURRELL AGENCY WOULD BE MAJOR STEP IN HIS PLAN

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Investment group Lighthouse Holdings hopes to capitalize on two of the fastest-growing niches in the advertising world: sports and ethnic marketing.

Terence Graunke, who has built and sold two successful marketing businesses in the last five years, aims to build a $150 million communication services agency. As revealed last month, he's in acquisition talks with Burrell Communications Group, Chicago, the leading African-American agency in the U.S. with billings of $168 million (AA, Sept. 28).

Mr. Graunke was the founder of Eagle River Interactive, Avon, Colo., which went public in 1996 and was acquired by Omnicom Group, New York, last year.

HURDLES LIE AHEAD

But competition will make it difficult to piece together a company of high-quality shops, while a volatile stock market diminishes the likelihood of an initial public offering for the new operation.

Lighthouse earlier said it had signed letters of intent with four agencies. In addition to sports marketing and ethnic shops, Mr. Graunke's game plan includes direct marketing and promotion agencies.

"When the VP of marketing of a Fortune 500 company makes a request to help sell their products or services, we want to be in the best position to deliver," said Mr. Graunke.

He said he was attracted to niche marketing because of its growth rate and fat operating profit margins, noting that while conventional advertising grows 10% to 11% annually, marketing services shops are seeing growth at a 25% clip.

But industry insiders warn Mr. Graunke's strategy is unproven.

`WAITING' FOR SUCCESS STORY

"I'm still waiting to see the success story," said Abbott Jones, managing director of consultancy AdMedia Partners. "The notion of putting together a group of small companies to make a strategically strong entity is going to be challenging, to say the least."

Plenty of obstacles lie in Lighthouse's path. There is a shortage of top-quality acquisition targets; many sports marketing agencies are small and have short client lists and few employees.

And the hyperactive stock market doesn't help.

"Part of the concept of [the venture] for the financial players is an IPO, and that market is dead," Mr. Jones said. "It's a very tough financial play. The ones that are successful are strategically motivated."

But the investors express confidence.

"I've been a principal investor in Terry's business for the last 12 years," said Casey Cowell, founder and former chairman-CEO of U.S. Robotics. "He puts the ball in the end zone."

Mr. Graunke's most recent success was Mastering Inc., a publicly traded information technology training company in Arizona. Between 1996 and 1998, the company grew fivefold to $50 million in revenue, and was purchased by Platinum Technology, a Midwestern company headed by Andrew Filipowski, another investor in Lighthouse.

EXPECTS TO BE AMONG TOP 10

Mr. Graunke expects Lighthouse, with anticipated revenue of $100 million from acquisitions in two years and an internal growth rate of 30% annually, to find a place among the nation's top 10 specialty-marketing groups in revenue, competing with such companies as Carlson Marketing Group, Minneapolis; Gage Marketing Group, Minneapolis; Omnicom's Rapp Collins Worldwide, New York; Interpublic Group of Cos.' Draft Worldwide, Chicago; and Frankel & Co., Chicago.

Marketing services "is growing faster than the economy as a whole; and direct marketing is one of the fastest, if not the fastest, growing marketing channels," said Harry Chevan, senior VP at investment banker Gruppo, Levey & Capell. "Their strategy sounds like a good idea, but there are a lot of good ideas. The question is, can you execute them?"

Ms. Rewick is associate editor at Crain's Chicago Business.

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