April 15, 2018 / 4:35 PM / 6 months ago

Breakingviews - Sorrell’s messy exit could put WPP in play

LONDON (Reuters Breakingviews) - Announcing a chief executive’s departure late on a Saturday night is never the sign of a well-functioning board. When that CEO has been in charge for 32 years, as Martin Sorrell was at WPP, shareholders have extra reason to worry. The silver lining is that Chairman Roberto Quarta has options to kick-start a turnaround.

Martin Sorrell CEO of WPP attends the World Economic Forum (WEF) annual meeting in Davos, Switzerland January 17, 2017

Sorrell’s exit has been a possibility since news of a probe into alleged “personal misconduct” leaked in early April. The 73-year-old, who denies the unspecified charges, on Saturday cited the disruption to WPP as the reason for leaving. Quarta will take the reins as executive chairman, alongside two co-chief operating officers, pending a permanent replacement.

WPP said only that the investigation had “concluded”. Yet it seems unlikely that Sorrell would have quit had he been cleared. So it’s all the more remarkable that the company is treating his exit as retirement, which means he is still eligible to receive up to 1.65 million shares in performance-related compensation over five years. Sorrell only gets the full amount if WPP hits targets linked to earnings growth, return on equity and shareholder returns. Even so, the maximum payout is currently worth almost 20 million pounds.

Quarta could help by calling some of his old private equity contacts. WPP, built through scores of acquisitions, has assets which could be sold. Take market-research arm Kantar, which Kepler Cheuvreux analysts reckon made about 350 million pounds of profit before interest, taxes and amortisation last year. Buyout firms have expressed interest, according to a person familiar with the matter. On a similar multiple to French peer Ipsos it would be worth 3.5 billion pounds including debt, enough to reduce WPP’s 4.5 billion pounds of net debt.

A braver buyer might even take a look at the whole group, which is valued at a one-third discount to its five-year average on a forward price-earnings basis. Including a 25 percent premium and debt, a buyout would cost more than 23 billion pounds. If the new owner boosted the unwieldy group’s EBITDA margin to 25 percent from 19 percent, and boosted revenue by a modest 1 percent each year, the internal rate of return from floating the business five years later on the same multiple would be 23 percent, according to Breakingviews calculations.

There are many risks. Sorrell’s contacts and force of personality were essential to knitting WPP’s disparate businesses together. Key staff could walk out of the door. Besides, advertising groups face deep challenges in the age of Google and Facebook. But Sorrell’s messy exit could at least give shareholders some cause for hope.

Breakingviews

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