With Sorrell gone, WPP could shed assets, analysts say

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Credit: WPP

With Martin Sorrell out the door, takeover vultures could soon circle, eyeing portions of WPPs business ripe for the taking.

At least that is the opinion of multiple financial analysts, who on Monday began speculating that the world's largest ad agency holding company could soon start selling off some of the sprawling businesses Sorrell built up over decades. Clarity probably won't come until WPP names a new CEO. But multiple analysts say the timing could be right for the company to begin paring down, or even to be sold entirely, as it battles financial headwinds.

"Sir Martin could arguably be called the glue that bound much of WPP together. With his departure, we think the chances of significant chunks of the business being sold off have dramatically increased," analysts from U.K.-based Liberum Capital Limited stated in a report Monday. French-based equity research provider Natixis piled on: "WPP now looks even more likely to be broken up or taken over."

WPP declined to comment.

Analysts pointed to WPP's market research business, housed most notably at its Kantar division, as being particularly vulnerable. Liberum suggested Sorrell was the main supporter of keeping market research providers within WPP. But now that he is gone, firms like Nielsen could emerge as buyers. Kantar "has been a notable drag on organic growth in recent years," Goldman Sachs analysts reported, noting that it achieved just 0.2 percent growth from 2014-17 compared with 2.6 percent for the rest of WPP.

Meantime, consultancies such as Accenture—which have sought to bolster their marketing services offerings—could show interest in WPP's creative, media and digital holdings, Natixis reported.

WPP looks particularly exposed at the moment, not only because of Sorrell's sudden departure, but because of its lackluster financial performance. WPP posted 0.9 percent organic growth in 2017 versus 1.9 percent for its peers, and has the weakest outlook this year compared to its competition, Goldman Sachs noted. "The quick fix is to look at asset disposals as a way of managing the group to faster growth, something that Sir Martin was loathe to consider," analysts from Citi stated in a report.

The uncertainty rattled investors. WPP's share price tumbled 6.5 percent Monday on the London Stock Exchange, the first day of trading since WPP announced Sorrell's exit. Moody's on Monday downgraded its outlook on WPP to negative from stable. "Sir Martin Sorrell's resignation comes at a time when the company is already facing a number of operational challenges and introduces uncertainty over the strategy and ultimately the structure of the group going forward," Christian Azzi, a Moody's assistant VP and lead analyst for WPP, said in a statement.

Greg Paull, co-founder and principal at R3 Worldwide, consulting firm that conducts agency searches, says there may be some breakup of WPP's assets to make the company easier to run. He says it would make sense that Kantar or the PR wing would be looking for other buyers.

Jay Haines, founder of executive search firm Grace Blue, agreed there would likely be some "thinning" at WPP. "There are too many assets," he says, which may have muddied the business. "It's difficult to really get a sense of exactly what it stands for, because it's so broad."

Whatever comes of WPP will depend largely on who succeeds Sorrell, of course. The company has said it would consider internal and external candidates. The list could include the two men who over the weekend were elevated to serve as joint chief operating officers: Mark Read, CEO at Wunderman and WPP Digital; and Andrew Scott, WPP's corporate development director.

In the short term, Read "will be responsible for clients, operating companies and people," while Scott "will focus on financial and operational performance and implementing the ongoing reorganization of the Group's portfolio," Roberto Quarta, WPP's chairman, stated in a memo to WPP leaders. Quarta was named executive chairman until a new CEO is named.

"Any executive filling Sorrell's shoes needs to orchestrate assets across the holding company and doing so is a challenge in a fragmented federation of businesses such as those which exist within WPP," Brian Wieser, who covers advertising for Pivotal Research Group, said in a note to investors. Still, he said that "It could very well be that anyone who might follow Sorrell on a full-time basis would bring new ideas to the holding company and lead the rebound that we think will eventually occur."

Paull says he thinks WPP is likely to look internally. "Knowing the ins and outs of WPP is going to be a great advantage," he says. "I think the fact that you've been in the machination of the company for the last 5 or 6 years is going to be critical."

A WPP agency exec concurred. "I think they'll first look inside. It is a huge, pretty complicated operation and so taking somebody from the inside who has worked across a bunch of agency networks would definitely be an advantage," this person says. "While there is no anointed successor, and that is a problem, there is a pretty deep bench of senior executive talent."

On Monday, WPP had more immediate concerns: rising pressure within its home country to release details on the internal probe it conducted into alleged misconduct by Sorrell, which led to his departure. On Saturday evening, the company stated that the probe had been completed and the allegation did not involve amounts that are material, but offered no further details. But in the U.K., Liberal Democrat leader Sir Vince Cable called on WPP to disclose details, British media reported.

The BBC reported that Cable accused WPP of sweeping the claims under the carpet," and accused the company of a "real lack of transparency."

WPP has indicated its intention to keep the investigation details confidential. Tom Denford, co-founder of media consultancy ID Comms, says it would be wise for WPP to be as transparent with clients as possible—not only about the Sorrell probe, but also its plans for the coming months.

"Right now is when advertisers have been asking more and more tricky questions than ever. They're really putting these groups under scrutiny," Denford says. "They're not afraid to ask tough questions."

WPP has "got to get ahead of it because there are going to be so many questions," he adds. "What we know from running major reviews is that there can be very fine lines between the winners and the losers. And it would be a huge risk for WPP for that to linger and that to be factored into any long-term decision making."

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