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LONDON (Reuters) - Japanese ad giant Dentsu is buying marketing group Aegis for 3.2 billion pounds ($5 billion), the biggest deal in its history as it seeks to expand outside its home market with the British firm's European and digital business.
Revealing how badly Dentsu needs growth outside its shrinking home market, it will pay a 48 percent premium to secure the takeover after European groups WPP and Publicis snapped up rival agencies in recent years.
The price represents 20 times full year 2012 expected price earnings, compared with the 10-11 times at which WPP and Publicis trade, said analyst Ian Whittaker at Liberum Capital.
The deal means Japan is the second most active overseas acquirer this year with more than $20 billion worth of deals, behind the United States but surpassing all major European nations and China in outbound M&A.
Analysts described the deal as a perfect strategic fit after Aegis Chief Executive Jerry Buhlmann turned the group around to grow in Asia Pacific, the U.S., emerging markets and digital marketing in recent years.
"The quality of the offer, the strong likelihood of deal certainty, the fact the offer was cash and the fact it was a meaningful serious approach meant that we entered bilateral discussions with them," Buhlmann said of Dentsu's approach.
Aegis, which has Coca-Cola, GM and Disney on its client list, has long been seen as a potential takeover target, although it had for years been linked to the French group Havas as French financier Vincent Bollore was the largest shareholder in both.
Aegis has performed strongly since selling its Synovate market research unit last year to focus on the faster growth areas of media buying and selling and digital communications.
In 2011, the group increased the proportion of its revenues from digital to a sector-leading 35 percent.
Analysts said the deal underlined the value present in advertising companies despite a tough economic climate and could lift the whole sector.
"We see the deal as underlining that the advertising sector still represents significant value," Bernstein analyst Claudio Aspesi said.
"The premium paid by Dentsu suggests they are confident of continuing long term growth for Aegis, despite recent negative commentary on the outlook for the European ad market."
For Dentsu, the deal enables it to find new growth outside its home market, which is eroding. Though the company dominates traditional Japanese print and broadcasting sectors, overall ad industry revenue fell 2.3 percent to 5.7 trillion yen ($72 billion) in 2011 -- the fourth annual contraction for an industry that in the past decade has shrunk by almost 6 percent.
"Dentsu and Aegis will be the market leader in the Asia-Pacific region, enjoying a strong presence across Europe and the fastest growing agency network in the US," President and CEO of Dentsu, Tadashi Ishii, said.
"In recent years, under the leadership of Jerry Buhlmann and his team, Aegis has been recognised as the most successful independent media and digital communications agency with strong performance momentum and talented, client-focused employees."
Dentsu said it had already purchased or had irrevocable undertakings in relation to around 30 percent of Aegis' stock, including shares from Bollore.
The Bollore group confirmed it had agreed to sell its 26.4 percent stake to Dentsu for 240 pence a share in a big payout for the group after it bought into Aegis in 2005.
Bollore will now have more capital to invest elsewhere, perhaps in his electric car battery project or in media-to-telecom group Vivendi where he is poised to take a 5 percent stake.
The deal comes months after Dentsu ended a nine-year alliance with Aegis' European rival Publicis. The French company bought back a 9.1 percent stake held by Dentsu in February, leaving the Japanese group with the firepower to strike another deal in Europe, analysts said at the time.
"We at Aegis are delighted at the prospect of being able to play a full part in helping Dentsu create a platform for global growth and continued digital innovation," Buhlmann said.
"By forming the first communications group with true global reach, the growth strategies of both businesses will be enhanced as we provide more scale, geography, capability and investment to support clients."
Morgan Stanley advised Dentsu on the deal, while Greenhill and J.P. Morgan Cazenove advised Aegis.
($1 = 0.6426 British pounds)
Additional reporting by Timothy Kelly and Junko Fujita in Japan and Leila Abboud in France; Editing by Sophie Walker