Y&R SELLING OFF STAKE TO S.F. INVESTMENT HOUSE; INSIDERS DENY MINORITY HOLDING COULD LEAD TO SALE OR TO IPO

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Young & Rubicam is expected to announce this week it is selling a minority stake to San Francisco buyout specialist Hellman & Friedman, but insiders deny the move is the first step toward a total sale or public offering.

Although there are several reasons Y&R would want to raise money, ad industry financial executives expressed surprise at the pending deal since Y&R has been employee-owned and fiercely private for all its 73 years in business.

"Why? It doesn't seem like this would be Y&R's first option for raising capital," said one investment banker.

DEAL IS CLOSE

Y&R declined comment on a report Friday about talks with Hellman & Friedman, but insiders confirmed a deal is close. At presstime, board members were awaiting word as to whether the board would meet this past weekend to vote on the deal.

The most likely reason for Y&R to raise money is to buy out retiring managers who have large stakes in the company-among them Alex Kroll, a former Y&R chairman.

It was widely believed in the financial community that Y&R had borrowed money earlier this summer to finance such buyouts as part of a recapitalization of the company (AA, July 8). At that time, a Y&R executive denied any sort of sale was under consideration.

MORE ACQUISITIONS?

Another reason for seeking additional capital could be to finance an acquisition spree. Y&R was one of the most aggressive buyers of diversified agencies in the 1970s, but slowed its pace of acquisitions considerably in the '80s and '90s. Recently, it has developed a bigger appetite, having bought midsize ad agency Waring & LaRosa, New York, this past spring and, more recently, having struck a deal to buy Media Edge from N.W. Ayer & Partners.

Several executives in the financial community said Y&R considered an initial public offering in the past six months, but decided against it when investment bankers projected an offering would generate a lukewarm reception on Wall Street because of Y&R's generally average growth rate and profit margin.

In '95, Y&R reported a healthy revenue gain of 14.4% to $1.2 billion. It doesn't report profits.

Y&R TO GO PUBLIC?

One executive speculated that Hellman & Friedman might help Y&R go public within two years, noting that buyout firms generally seek to generate returns by buying, cleaning up and then selling companies rather than by holding investments more than five years and relying on earnings growth.

But others noted Hellman & Friedman appears not to be taking a management role at Y&R. Also denting the quick turnaround theory: the fact that outsiders overhauling an ad agency for quick profits is not a strategy with a successful track record.

'NOT A GOOD DEAL'

"This doesn't look like a particularly good deal for either party," said one large agency financial executive. "Y&R has to give up its 100% ownership and the outside firm gets an investment in a business where such investments haven't been that successful in the past."

Publicly traded agency holding companies such as Interpublic Group of Cos. and Omnicom Group would welcome Y&R joining them in the public markets. Having another agency stock would increase analyst coverage of the industry and provide a more active trading market for them.

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