Publicis, Saatchi announce $2 billion merger

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Publicis, Paris, unveiled plans June 20 to pay nearly $2 billion for London-based Saatchi & Saatchi in a friendly takeover that will create the world's fifth-largest advertising company. The all-stock deal, unveiled in Paris by top executives from the two companies, will create a new industry giant with global revenue topping $2 billion this year and a market capitalization of $6.1 billion.

The new company, to be baptized Publicis Group, also will have substantial media-buying interests, with Publicis' Optimedia division and Saatchi & Saatchi's half-interest in Zenith Media representing combined activities topping $16 billion. The other half of Zenith is owned by Saatchi's former partner, Cordiant Communications Group.

"This deal will radically transform our group," Publicis Chairman Maurice Levy told journalists and financial analysts. "It brings together two of the top brands in our industry--Publicis and Saatchi & Saatchi--and opens up tremendous growth potential. This represents not only a quantum leap in size, but a real advance in responding to challenges faced by our clients," Mr. Levy said.

The Publicis-Saatchi merger--under quiet negotiations since late 1999 and now scheduled for completion in mid-September--comes on the heels of the French group's failed bid to scoop Young & Rubicam, New York, out from under the nose of WPP Group, London.

The driving element behind both the failed Y&R bid and the successful deal for Saatchi was to bring Publicis a second agency network, capable of improving its position in the U.S., historically its weakest market. The French group currently is 10th on the Advertising Age table of global advertising groups, vs. a No. 12 spot held by Saatchi, but Publicis' U.S. revenue barely place it in the top 20.

In 1999, Publicis recorded just 27% of its total revenue in the U.S., vs. 38% of revenue recorded in Europe--22% came from France alone. Taking Saatchi's strong U.S. presence into account, the new Publicis will have a much more geographically balanced portfolio, with 49% of all revenue emanating from Europe, 38% from the U.S. and 13% from the rest of the world.

The agency will be "a major force in all major markets," Mr. Levy said, adding that it will "enter the top 10 in the United States, and hold down the No. 1 position in China, without question the biggest market of the future."

Publicis will follow the widely accepted industry practice of operating its two agency networks as completely separate, competitive entities, Mr. Levy said, noting that anchor clients for both companies had accepted this aspect of the deal.

Publicis handles advertising for carmaker Renault, beauty products leader L'Oreal and Swiss food giant Nestle, while Saatchi & Saatchi's leading clients include Toyota, Procter & Gamble Co. and General Mills.

These key clients have reportedly accepted the proposition that Publicis and Saatchi should be allowed to function in a similar manner as networks owned by other holding companies like WPP or Interpublic Group of Cos.

Saatchi & Saatchi CEO Kevin Roberts explained the deal in recent days to top executives at his main clients, which comprise more than 30% of total revenue.

Mr. Roberts said P&G's new president-CEO, A.G. Lafley, told him that the deal "will make Saatchi & Saatchi stronger, more competitive and help us hire the best creative people."

Mr. Roberts added that his anchor client was thus "very supportive."

Similarly, Mr. Roberts said top Toyota brass were "happy that the deal will give Saatchi & Saatchi more international power," adding that the carmaker has been inquiring as to the agency's global strategy for some time now.

General Mills, which already operates a European joint venture in the cereal sector with Nestle, saw "no problem with the deal," Mr. Roberts said.

While the clients may be happy, financial analysts attending the presentation of the new group questioned the relatively high price Publicis paid for Saatchi. Traders seemed to duplicate these misgivings, with Publicis losing substantial ground amid strong activity on the Paris Bourse later in the day.

Financial documents presented during the news conference note that Saatchi shareholders will receive 1.64 Publicis shares for every 100 Saatchi & Saatchi shares. Publicis will thus pay $7.55 for each Saatchi share, representing a 51% premium over the closing price on the last business day before to the announcement that Saatchi was in merger talks with an unnamed suitor.

The offer represents a 39% premium over the average closing price over the six-month period preceding Publicis' offer, and comes with a built-in adjustment mechanism guaranteeing Saatchi shareholders a fixed price band in the event of fluctuations in the price of Publicis shares.

Mr. Levy was undaunted by questions on the financial side of the deal, which he said offers "a premium in line with that paid during other, similar operations" across the industry in the past half-year.

Specifically, Mr. Levy was referring to premiums paid by WPP in the recent Y&R acquisition and by Havas Advertising, Paris, in the acquisition of Snyder Communications, Bethesda, Md., both of which also drew hostile reactions from industry analysts.

Mr. Levy also justified the high purchase price by noting that the combined Publicis Group will benefit from cost savings, synergies and growth opportunities far greater than those available to either company on an individual basis. While he was unwilling to put figures on these savings, he noted that the new Publicis Group would maintain one sole corporate headquarters in Paris, share real estate in many areas of the world, benefit from joint management in a host of areas and likely realize some tax savings.

"It isn't the numbers on cost savings or synergies that are important to the success of a deal like this," said Saatchi's Mr. Roberts. "It is the new ideas brought to the table and the passion of the people involved in the process that matter. And our people think this deal rocks. We have come home, and we are comfortable here."

Beyond the initial cost savings, both Mr. Roberts and Saatchi Chairman Robert Seelert insisted that new growth opportunities were the key element convincing them to accept the alliance with Publicis.

The two groups already share several top clients, including Visa International, Hewlett-Packard Co. and Renault. Mr. Roberts believes the merger will shortly offer Publicis the opportunity to consolidate these and other accounts.

As an example, he points to Visa, a Saatchi advertising client in both Asia and Europe, as well as a client in the U.S. of Frankel, Chicago, Publicis' leading marketing services division. "This new situation offers us a real possibility to squeeze BBDO for the U.S. business," Mr. Roberts says.

Copyright June 2000, Crain Communications Inc.

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