Publicis’ $4.4 billion acquisition leaves analysts skeptical

Analysts are skeptical about Publicis Groupe’s plans to buy data marketing firm Epsilon for $4.4 billion, noting past integration struggles and a questionable strategic fit.

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Publicis Groupe, one of the world’s largest ad holding companies, contains agencies including Starcom, Leo Burnett and Digitas. The advertising world is grappling with the huge growth of digital advertising and the emergence of Facebook and Google, which collect huge amounts of detailed data about users and use it to target ads. Publicis hopes this deal will help its clients make sense of the data they already have on their customers, and use it to better understand what customers might do next and see how well their ads are working.

Publicis CEO Arthur Sadoun explained what he sees as the upsides of the deal in a call with analysts. He noted that when buying a car, a customer would have 900 digital interactions. That means ad clients in that realm need to know how to reach people as they get closer to purchasing a vehicle, and data from Epsilon could help.

« You just take this number and you understand why there is no way for our client to continue to grow profitably if they don’t deliver personalized experience at scale, » he said. « If they’re not able to touch those people within those 900 points in the right way with the right message at the right time and with the right offer. When you start there, you understand why our clients are so interested in Epsilon. »

But analysts responded with caution.

Publicis does not have a great track record integrating acquisitions, and analysts questioned whether history would repeat itself here.

In November, Sadoun said the integration of Sapient, the digital and tech firm which the holding company bought for $3.7 billion in 2014, took three years and was « a nightmare. » He said at the time that bringing together creative and technology is difficult because of the « cultural shock. »

Macquarie analysts said their first reaction to the Epsilon acquisition was « trepidation. »

« This is Publicis’ largest deal yet, and betting on acquisitions has produced a mixed track record, most recently negative: after 4 years of Sapient on the books, Publicis’ revenue is still fluctuating around zero, and in Q1 was -1.6%, » analysts wrote in a research note. Macquarie did say it sees the potential of Epsilon’s first-party data and identity resolution services to complement Publicis.

« We don’t cover [Alliance Data Systems] but our limited understanding of Epsilon is that it has struggled lately; therefore, success of this deal will come down to execution, » Macquarie analysts wrote.

Analysts also questioned how well Epsilon will fit into Publicis’ strategy.

Morgan Stanley analysts said Epsilon should add to the data and analytics services Publicis can provide its clients, but said investors will likely focus on the ongoing attrition in traditional advertising, which would remain about 75% of Publicis’ revenues following the deal.

Barclays analysts said in a note this deal gives Publicis first-party data on U.S. customers, but questioned how useful they would be. « At first sight, Epsilon does not seem to fit Publicis’ strategy that well. »

Credit Suisse analysts said the deal echoed other agency acquisitions in recent years, such as Dentsu Aegis Network’s purchase of a majority stake in Merkle, or Interpublic Group of Cos.’s buy of Acxiom’s marketing solutions unit. But the analysts were cooler about this deal, noting that Epsilon « is a more varied asset with other agency-like revenue streams, it has a mixed historical track record and is a big departure from the organic strategy Publicis was following. »

Liberum analysts said the deal is an « overall positive » since it increases Publicis’ ownership of first-party data at a time where the importance of ownership is increasing.

But Liberum noted the price was also « much cheaper » than $5 billion suggested in press reports, « which suggests competition for the asset was maybe not as much as expected (and may raise questions as to how ‘must have’ the asset was). »

On a call with analysts Monday, Liberum analyst Ian Whittaker asked why there wasn’t more competition for the deal given how attractive it apparently was to Publicis.

« You’ve said the asset is very good, it fits into your strategy, you’ve … talked about potential longer-term growth, and yet the multiple you’ve paid for it doesn’t seem particularly demanding on that, » he said.

« We do know that in the beginning there were lots of players, » Sadoun countered, « and we do know in the end there were around three. »

Sadoun added, « We are talking about a business that not only does data, that not only does technology to actually enrich data, that not only has platforms, which are three distinct things, but that they were doing the three of them in a connected way, which makes them extremely unique in the market and difficult to compare with other assets that you know. That’s why we were so interested. »

He said Publicis had been interested « three times, » including before Epsilon was up for sale.

Publicis also reported its first quarter revenue early, seeing net revenue in the first quarter of 2019 of €2.12 billion ($2.40 billion), up from €2.08 billion ($2.35 billion) in the first quarter of 2018. Its organic growth dropped 1.8 percent, mainly reflecting attrition of a « handful » of consumer packaged goods clients, the company said.

Peter Boardman, managing director at NWQ, questioned the company during an analyst call about its decision to suspend a share-buyback program to pursue the acquisition.

« I know you’ve been talking about doing share buybacks this year — if you compare your valuation versus Epsilon, it seems like you should be buying back your stock if you had the same type of growth expectations you had at the beginning of the year, » he said. « I just sort of wonder why do this deal given that you should be buying back your own shares. »

He also pressed Publicis on performance in recent years.

« If you look at your execution over the last four years, your revenues are flat, your profits are flat, you’ve made a lot of acquisitions on a pro forma basis, you haven’t really generated any value for shareholders. Why do you think this is going to be different? »

Sadoun said he agreed the company has struggled with organic growth but said this acquisition should help.

« I don’t want to look defensive, so let’s be clear, » Sadoun said. « You’re right. We have an organic growth challenge at the moment. »

He said that’s in part because the company is heavily weighted in consumer packaged goods, and it claims some of its clients in that sector have seen significant decreases in revenue, which he says started four years ago.

« We are obviously not happy with our growth, » he said. « Having said that, I can’t let you say that we made no progress in the last few years. You talk about flat profit, we are increasing again our profit this year by 60 basis points, having by far the best margin of the market. »

Source: CNBC

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