Stand Firm, WPP. This Japanese Ad Agency Can Pay More

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Even before the divorce, WPP is squeezing for more alimony.

Martin Sorrell
Martin Sorrell Credit: Courtesy WPP

Shares in Japan's third biggest advertising agency Asatsu-DK Inc. soared as much as 20.5 percent Tuesday, the most on record, after venture capital firm Bain Capital offered to buy out the company for $1.3 billion.

Asatsu-DK is trading at 3,810 yen ($33.68) per share, higher than Bain's 3,660 yen bid price. In other words, the market believes Bain will sweeten its offer. Asatsu-DK's largest shareholder, London-based WPP, the world's biggest advertising firm, has indicated Bain's offer is too low, according to people familiar with the matter.

Traders in Tokyo are making the right bet. Currently, WPP owns 24.7 percent of Asatsu-DK. U.K.-based value fund Silchester International Investors LLP holds 17.2 percent, while Northern Trust Corp. and Franklin Resources Inc. have 9.2 percent and 7.1 percent respectively. So long as WPP has two of the three money managers in its camp, it has the majority vote and power to block any deal.

Asatsu-DK's major shareholders will probably be on WPP's side, at first. They're no fans of President and CEO Shinichi Ueno.

Asatsu-DK is "going nowhere," writes Nicholas Tanner of Pearl Hill Advisors. With a 5 percent market share, the ad agency lacks buying power and its gross margins of 15 percent are and will probably remain lower than market leaders Dentsu Inc. and Hakuhodo DY Holdings Inc., which command market shares of 22 percent and 17 percent.

WPP hasn't been a happy partner since it bought a quarter of Asatsu-DK in 1998 for 30 billion yen. Almost twenty years after its original purchase, WPP's stake is worth only about 39 billion yen. Meanwhile, Asatsu-DK has been trying to placate WPP with special dividends. But since its business operations are sinking, so are the cash payouts. In conjunction with Bain's offer, Asatsu-DK said it has changed its year-end forecast to "no dividend,'' and intends to end its tie-up with WPP and sell its 31.3 million shares in the advertising giant.

Given Asatsu-DK's ownership structure, Bain has probably recognized it needs to raise its offer. The private equity firm will likely want to increase its price gradually, and alienate the other key shareholders from WPP along the way.


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