STW reports $53m loss on back of write downs

By Rachael Micallef and Arvind Hickman | 19 February 2016
STW CEO Mike Connaghan

STW Communications Group has reported a $52.6 million loss in 2015 after it had to write down $92.2 million ahead of its merger with WPP.

In its full year results announcement, the group increased revenue by 2% to $416 million, but underlying net profit was down 13% to $39.6 million. Earnings before interest, tax, depreciation and amortisation (EBITDA) was $76.8 million, down 8% from the prior year result of $83.3 million

Non-cash impairment charges of $81.8 million were written down. These charges can occur when company assets depreciate in value or there are changes to accounting policies.

There was a further $10.4 million in one-off costs associated to a strategic review.

In an investor presentation, STW was keen to highlight its second half results independently, with chief financial officer Lukas Aviani calling the group's the second half results “a great turnaround to what we saw in the first six months”.

Aviani says much of the full-year costs were incurred in the first half and in relation to the strategic review.

"The important thing to note here is that, substantially, all of those costs were expensed in the first half of the year, but, importantly, all of the cash cost that we incurred with respect to the strategic review and its outcome were in the first half result,” Aviani says.

Hence, the number we report in this second half are a clean set of results and aren't adjusted for additional restructuring.

Indicative of this return to a solid performance in the second half, I’m pleased to report we achieved solid organic revenue growth in the second half.”

Organic revenue growth in the second half of the year was 0.4%.

STW also announced it will be not providing full year guidance for 2016 given the impact its proposed merger with WPP could have on the business.

However, it did note that as a stand-alone business, STW is expected to deliver mid-to-high single digit underlying net profit growth.  

The shareholder meeting to vote on STW's merger with WPP will take place in late March with the merger expected to be sealed in April.

Merger to "accelerate strategy"

In addition, STW CEO Mike Connaghan moved to clarify much of the questions and speculation surrounding the proposed merger with WPP.

The proposed deal, which was announced to the market last December, will see WPP become a majority shareholder of STW with a shareholding of 61%, up from its current holding of 23.5%.

It will also see STW become the primary operating vehicle for WPP in Australia and New Zealand, under a new name which will align it further with the WPP businesses.

Connaghan says the deal will benefit both groups in bringing some of the best local brands from STW together with the global footprint of some of the large brands under the WPP umbrella.

"We will now be the leading player across every vertical in our business," he says.

Local oversight

From an operational perspective, Connaghan says the merged entity will continue to have local oversight and a direct line of decision-making to the ANZ offices of global brands.

Australia is a long way away from the head offices of these businesses, which are usually in London or New York or somewhere in the Northern Hemisphere," Connaghan says.

"Australia and New Zealand has been a difficult market and remains a difficult market, not necessarily for WPP but certainly for some of the global holding companies. 

"Certainly having STW here with close local oversight, helping to bring the companies together and bring local client work to those business is a major part of the rationale of this deal.”

In addition, Connaghan says the proposed merger with "accelerate" the momentum started in the strategic review, noting the cost synergies are "far greater now if we come together than we could have achieved alone".

Connaghan also pointed to WPP's track record in creativity and effectiveness, along with its data tools. WPP owns some of the largest advertising brands in the world, including Y&R Group, GroupM and VML.

A Grey opportunity

However, Connaghan pointed to Grey specifically as a “major opportunity” for growth for the combined entity.

“[It has] only a small presence here in Australia, so we see that as a major opportunity for the group going forward,” Connaghan says.

“Grey was one of the most awarded businesses in the advertising game last year, they had a fantastic year.

“We think that the opportunity for Grey in Australia as something that we can really help with and really get them into the main game.”

AdNews took a deep look at what the STW and WPP merger will mean for agencies.

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