The combination of Havas, the No. 6 ad holding company, and No. 7 Grey would create the world's No. 5 player, behind Publicis Groupe and ahead of current No. 5 Dentsu.
Investors are skeptical given Havas' high debt and poor performance. Last year it lost $444 million, including restructuring and impairment; revenue fell 17% to $1.88 billion.
It could face another obstacle: French corporate raider Vincent Bollore last week bought a 4% to 5% stake in Havas, parent of Arnold Worldwide Partners and Euro RSCG Worldwide. Some industry watchers bet Mr. Bollore will pressure Havas to scrap a Grey bid. He is known for investing in undervalued companies, holding management accountable and boosting stock prices.
Havas stock has fallen 72% since it began U.S. trading in 2000. It hit a 2004 low early last week on rumors of a Grey bid but moved up July 30 when Havas disclosed Mr. Bollore's stake. Mr. Bollore couldn't be reached by press time. A Havas spokeswoman declined to comment.
In late May, Grey hired Goldman Sachs and J.P. Morgan Chase & Co. to shop the company. Bankers hope to do a deal by mid- to late August. No. 2 holding company WPP Group is seen as the strongest potential "strategic"-or ad-industry-buyer, but it has yet to sign investment bankers. WPP last week had no comment.
Quadrangle, co-founded by Steven Rattner, has stakes in media companies including Cablevision Systems Corp. But it's a small firm-with a stated private-equity fund of $1.08 billion-to be going after Grey, with a market cap of $1.2 billion. Quadrangle declined to comment.
Private-equity firms invest no more than 5% of their money in a single deal so as not to skew the fund's risk profile, according to one expert.
Other financial firms, including Hellman & Friedman and Blackstone Group, are believed to be scoping Grey. Blackstone likely would do a deal only if it teamed with another investor. Thomas H. Lee Partners is another private-equity prospect. Hellman, Blackstone and Lee declined to comment.