Advertising Sector to see More Bolt-on Deals but not Major M&As

Fitch Ratings said that Japanese advertising group Dentsu’s agreed £3.2bn (US$4.94bn) acquisition of UK-listed peer Aegis creates a viable fifth global advertising holding company, and emphasises the importance of digital expertise to the sector. But the credit ratings agency (CRA) expects bolt-on acquisitions, rather than large company takeovers of this type, to remain prevalent, giving further work to treasurers.

It does not believe that Dentsu’s move signals an increase in major mergers and acquisitions (M&A) risk in the sector.

Fitch said that in bringing significant international exposure and strong digital capabilities to Dentsu, whose revenue has mostly been generated in its domestic Japanese market, the transaction should increase competitive pressure on Interpublic Group (IPG), Omnicom, Publicis, and WPP. About 35% of Aegis Media’s revenue is derived from digital or online businesses.

Fitch added that the need to grow in new markets, and add digital capabilities, will drive further M&A activity in the sector. However, the CRA expects this to consist of smaller, although sometimes substantial, deals such as WPP’s £350m acquisition of a majority stake in digital agency AKQA, announced in June, and Publicis’s move to take full control of Bartle Bogle Hegarty, completed earlier this month.

One reason is simply that, with Aegis off the table, there is one less large target company, according to Fitch. A large proportion of industry revenue is concentrated in the global, diversified ad agencies, which have already engaged in large M&A to become global operators. This has not precluded major takeovers, such as WPP’s £1.6bn acquisition of Taylor Nelson Sofres (TNS) in 2008. But the emphasis has shifted towards bolt-on deals that, because of the fragmented nature of the industry outside the top five or six agencies, will always tend to be smaller.


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