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Fitch Affirms WPP at 'BBB+'; Outlook Stable
May 15, 2015 / 3:41 PM / 3 years ago

Fitch Affirms WPP at 'BBB+'; Outlook Stable

(The following statement was released by the rating agency) LONDON, May 15 (Fitch) Fitch Ratings has affirmed UK-based WPP Plc's (WPP) Long-term Issuer Default Rating (IDR) and senior unsecured rating at 'BBB+'. The Outlook is Stable. A full list of ratings actions is below. WPP's rating reflects its leading market position within the communications services sector and its effective diversification across geographies, products and customer market sectors. The rating is supported by strong cash generative capability, a business model that maintains some inherent operational flexibility in the event of potential macro-economic downturns and a consistently applied financial policy. Fitch expects that leverage will increase during 2015 but remain within the guidelines for the 'BBB+' rating albeit with reduced headroom. The increase results predominantly from M&A with increasing cash tax payments, higher capex levels and growth in shareholder distributions also contributing. KEY RATING DRIVERS Strengthening a Diversified Portfolio WPP has a strong portfolio of advertising, measurement, market research, PR and brand management businesses within the communications services sector. The breadth and scale of the portfolio enables the company to provide a more complete end-to-end service across most geographic regions and industry sectors. WPP is increasingly integrating its portfolio of businesses through the provision of common back-end services and including data analytics as part of the pitch to clients. Fitch believes this will help the company sustain its market position while providing scope to improve operating margins or manage pricing pressure. Growth Drivers WPP's strategy for growth is to increase its exposure to faster growing markets and to raise the proportion of revenues from new media and data analytics. Faster growing markets such as Asia Pacific, Latin America, Africa, Middle East and Central and Eastern Europe currently account for 30% of total revenues while services from new media account for 36%. WPP has been consistently implementing the strategy over the past few years and aims to raise the revenue contribution from new markets and new media to 40%-45% in the next five years. Cost Flexibility As revenues are driven by the marketing spend of corporates, WPP has a cyclical exposure linked to changes in GDP. Diversification helps from this perspective, but maintaining flexibility in the cost base is equally important. We consider there are two main drivers from a credit perspective. Firstly, 8% of costs in relation to net sales are variable staff costs which can be reduced if needed. Secondly, the vast bulk of the group's operating leases are linked to property rental which can be downsized in a scenario where there is a sustained economic downturn. Ongoing M&A Strategy WPP has consistently used M&A to support its growth strategy and to hedge itself on new technology and products which may be important. WPP's inorganic approach has been disciplined, in Fitch's opinion, with some investments, for example in programmatic advertising made with good foresight at reasonable valuations. We expect WPP to continue its investment programme focusing on small to medium size business and potentially, associate investments in bigger companies where access to knowledge or products could be of value to the group. The budget for new acquisitions remains at GBP300m-GBP400m, although total M&A spend could reach around GBP700m in 2015 including part payments for ComScore and IBOPE investments made by the company. Cash Generation and Shareholder Returns Fitch estimates that WPP will generate between GBP1.1bn to GBP1.3bn of pre-dividend free cash flow annually over the next three years. Management continues to identify M&A, dividends and buybacks as its priority uses of free cash flow while managing its balance sheet within its target leverage range of 1.5x to 2.0 x average net debt to headline EBITDA. The company has maintained its share buyback target for 2015 at similar levels to 2014 at 2%-3% of outstanding shares, but its dividend pay-out ratio may increase to 50% from 45%. 2015 Leverage Likely to Increase It is likely that WPP's leverage will rise over 2015, with average net debt to EBITDA forecast to increase in 2015 up to 1.9x from 1.6x in 2014. The extent of the increase in leverage will predominantly be driven by M&A spend and supported by growth in cash taxes, higher capital expenditure and growing shareholder distribution. We expect leverage to reduce thereafter assuming no change in financial policy and M&A spend. KEY ASSUMPTIONS - Organic revenue growth to grow in line with GDP, supplemented by M&A to give annual revenue growth of 3%-4% per year from 2016. - Operating margins to expand by 20-30bp per annum over the next four years. - Capital expenditure to increase from 1.9% of revenues in 2014 to 2.4% per year. - Share buybacks of 2%-3% of share capital per year. - A dividend pay-out ratio of 45%. - M&A expense in 2015 of GBP750m before returning towards historical levels from 2016 onwards of GBP300m- GBP400m per year. - Leverage managed within the company's target of 1.5x to 2x average net debt to EBITDA. RATING SENSITIVITIES Negative: Future developments that could lead to a downgrade include: - Events leading to average net debt/EBITDA trending consistently and materially above 2x. - Funds from operations adjusted net leverage (calculated using average net debt) remaining sustainably above 3.75x and pre-dividend free cash flow margin remaining consistently below 7% would also put pressure on the rating. - A weakened operating profile or a change in financial policy, more so than M&A or cyclically driven trends, which would put pressure on the ratings Positive: Future developments that could lead to positive rating action include: - Notwithstanding a strong industry position, diversification and a flexible cost base, the company's financial policy - balancing the need to invest in acquisitions, a progressive distribution policy and a measured leverage profile - are likely to constrain the ratings. FULL LIST OF RATING ACTIONS WPP Plc, Long-term IDR: affirmed at 'BBB+', Outlook Stable WPP Plc, Senior unsecured rating: affirmed at 'BBB+' WPP Finance S.A, Senior unsecured rating: affirmed at 'BBB+' WPP 2008 Ltd, Senior unsecured rating: affirmed at 'BBB+' WPP Finance 2010, Senior unsecured rating: affirmed at 'BBB+' WPP Finance 2013, Senior unsecured rating: affirmed at 'BBB+' WPP Finance Deutschland GmbH, Senior unsecured rating: assigned 'BBB+' Contact: Principal Analyst James Hollamby Analyst +44 20 3530 1656 Supervisory Analyst Tajesh Tailor Director +44 20 3530 1726 Fitch Ratings Limited 30 North Colonnade London E14 5GN Committee Chair Damien Chew, CFA Senior Director +44 20 3530 1424 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: Additional information is available on For regulatory purposes in various jurisdictions, the supervisory analyst named above is deemed to be the primary analyst for this issuer; the principal analyst is deemed to be the secondary. Applicable criteria, 'Corporate Rating Methodology', dated 28 May 2014, are available at Applicable Criteria and Related Research: Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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