Buyers of advertising agencies, looking to acquisition as a growth strategy, are sniffing around Australia's vibrant independent advertising sector.
Many agencies were reluctant to consider a sale in 2023 because the economic climate made it hard to achieve enough growth to impress.
But that could change this year, according to industry analysts and mergers and acquisitions experts.
In the game of starting your own agency, building a business and then selling, 2024 might be the time to get that payout.
And if you drop in to the offices of enough independents, mainly in Sydney but some in Melbourne, a quiet chat will reveal a willingness, a keenness, to sell.
Or go to an industry event and eavesdrop. Many working in holdcos have secret desires to start their own agency. These are the acquisitions of the future.
The big Australian independent agency sales recently were RyanCap and Sparro, both of a size to be attractive to offshore buyers.
In the past many started an agency hoping to be bought by a global holding company such as WPP. Lately the big global independents are actively seeking bolt-ons, a fast way to add revenue growth.
UK digital marketing agency Brainlabs in January this year acquired Australian independent media agency Sparro, founded by brothers Morris and Cameron Bryant.
Sparro had a team of more than 110 and handles $200 million of annual media spend for clients including Estée Lauder Companies, Catch, Temple & Webster, Petbarn, Webjet and Destination NSW.
RyanCap, founded in 2020 by Simon Ryan, with 70 staff, went to French digital strategy group Labelium in November last year. The client portfolio includes Bet365, MyDeal, Live Nation, Anthem, Mahindra, MYOB, Big4, Hisense, CommBank KIT, Stratton Finance, Ray White, Ignite Travel, Click Frenzy, SelfWealth, AGL and Sleepmaker.
“I didn't set this business up to be sold in the timeframe that it was,” Simon Ryan told AdNews.
“I thought that I would have it for five to 10 years and then seek some form of liquidity event, either a trade sale or a listing.”
Ryan still gets around to talk to smaller independents and now, as part of a global organisation, he might consider the odd acquisition as a growth strategy.
“There are a lot of agencies out there that do live in the hope that one day that they'll be bought,” he said.
“And that's not only in our industry. People start businesses to have an end game or an end goal.
“But I do think there are a number of agencies out there pretty keen to sell. It's pretty obvious.
“If I look at what I read, and their publicity, and their activity on LinkedIn, you can put it all together.”
Ryancap was advised by SI Partners which provides sell-side and buy-side advice on strategic M&A and private equity investments.
Alyssiah Tsui, partner at SI Partners, says there’s a lot of demand to buy agencies.
But buyers, including private equity and larger offshore independents, need scale. A 100 plus staff plus growth, a deep client list and perhaps a speciality.
“Lots of people will of course try to build businesses organically but it's quite hard work because you need good leadership and all the good leadership talent have all gone off and set up their own businesses,” she says.
“For them to build that strategy of continuous growth, it is actually easier for them to just acquire.”
WPP has long been a big buyer of agencies, including in Australia. Dentsu had a run of buying but Publicis has taken over. Omnicom has been quiet but has started buying again.
During COVID, private equity money was on the ascendency because of the deal structure. They offer more cash upfront than a traditional trade sale which involves an earn out period.
“That upfront can be quite attractive for a vendor who's wanting to sell,” says Julia Vargiu, the Australia director of SI Partners.
“They were able to offer more attractive deals to vendors looking to sell and so the holding companies couldn't quite keep up.
“I think that's shifted in the last 12 months where those PE businesses are reaching a scale where the acquisitions need to be larger.”
The global holding companies have become more active in the last 12 months, because the prices have calmed a little.
Private equity (PE) backed companies, including those which acquired RyanCap and Sparro, are also on the hunt to get growth via acquisition.
The majority of their acquisitions are bolt-ons to existing portfolio businesses, rather than first money.
“If you look at marcomms, our world is still relatively new for PE, as this space has only been interesting to them in the last couple of years, because traditionally they have invested in other areas,” says Alyssiah Tsui.
“So the first money has gone in and there’s all these wonderful success stories where they were able to exit to the likes of WPP.
“And so that has attracted more PE money into this world. And now they've backed their horses and the last couple of years have been more about building that .
“They have a buy and build strategy, with bolt on acquisitions. Most of them who receive first money will be doing first acquisitions within the first 12 months of PE money going in.
“That's why we say there's a lot of dry powder at the moment because there's a lot of demand to buy things but there's just not enough supply.
“There's a valuation gap. I would say last year hasn't been good to a lot of businesses. They're probably flat in their profitability or maybe even in a slight decline.
“They don't want to sell their business when it's not performed that year: ‘Why would I sell my business when I'm not going to get an optimised valuation for it?'
“But the PE and even the holdcos: ‘We really still need to buy businesses, it's still part of our growth strategy. I need to buy businesses to make my numbers look good.’
“But they can't agree on the valuation.”
Founders and entrepreneurs are expecting business to be better in 2024 so will be more open to an approach for a sale.
One of the biggest issues in Australia is scale. Having a 100 person agency is large. For the UK, that's medium, and for the US that is small.
Australia used to be seen as the outpost but is now seen as more of a launchpad.
“It's really the star, you could say, of Asia, because it's one of the only markets that is able to achieve scale,” says Julia Vargiu.
And part of the attractiveness of Australian agencies is the people.
“Agency talent in Australia are brilliant…good quality of work, easy to work with,” says Hong Kong-based Alyssiah Tsui.
Part of a presentation by SI Partners:
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