What does STW and WPP merger mean for agencies?

By Rosie Baker, Pippa Chambers & Rachael Micallef | 14 December 2015

The full impact of the STW Group WPP merger on the Australian market and those agencies that sit within the newly formed entity is yet to be seen, but in an investor call following the ASX announcement this morning, STW Group CEO Mike Connaghan laid out further details on a number of aspects of the deal, including changes to headcount, further mergers and financial performance.

The last two years have been tough for STW with the financial performance described as “challenging”. Today, speaking on the investor call Connaghan said that STW has “had some good years and some less good years”, but when asked by AdNews how fast the WPP deal and the strategic review will start to turnaround performance, Connaghan said 2016 will “be a year of growth”.

“We absolutely believe next year we would have growth … For the last couple of years we didn't get the kind of growth that we were hoping and last year was a tough year, we had a few businesses which really let us down quite badly but all the changes have been made within those businesses and they are back on track and we absolutely believe that 2016 will be a year of growth,” he said.

The WPP merger doubles the size of the business and STW believes that the newly formed, larger organisation will grow at the same rate. The cost of implementing the deal sits around $10 million, and it's set to be completed by the end of March/early April. While the full pelt of the merger won't be felt until about 2018, “synergies will ramp up” in 2016.

Connaghan was not afraid to admit the group has also had “some not so amazing years”, and stressed that it really chose WPP as its international partner back in 1998, when it first took a 23% stake in STW - adding that today's deal was STW's “destiny”.
Commenting on the merger, which he said is “absolutely transformational for the STW Group”, he added: “This new group strategy puts us head and shoulders above anyone else in this part if the world. It just makes sense - it's an incredible opportunity not just for the company and shareholders, but also for our people and our clients,” he added.

Here's some key take-outs from the investor call and Q&A.

On the new structure and removing ambiguity:

STW Group has been on a course to reduce the complexity of the group over the last six months as part of a strategic review which sought to reduce the number of businesses within the organisation, but the merger in fact reverses that and doubles the size of the group.

Connaghan said: “It doubles the size of our group, but it simplifies the structure and takes out the ambiguity from the shareholding. We will be looking at a structure and how we best manage it from the centre – yes we're much bigger but yes we're much simpler and certainly a lot stronger”.

Connaghan said that it is too early to talk about further mergers and divestments across the STW and WPP groups in their newly merged entity, commenting that WPP particularly is “not in the business of divestments”, but that there will clearly be some opportunities around making some entities “bigger and better” if they come together.

Around the strategic review occurring across STW this year, he added that the work it wanted to do rationalising its business has largely been done.

“A few years ago [Sir] Martin Sorrell gave me a line which I've been using ever since which is: 'A lot of value can be destroyed for the sake of organisational neatness'. We'll be taking it one step at a time and where there is an opportunity we'll obviously take it, but we need to get everybody on board with that construct,” he said.

The other key agency shift of the deal is the impact of the joint ownership entities which includes Ogilvy, Ogilvy PR, J. Walter Thompson, Added Value, Mindshare and Maxus. Formerly the group had different ownership structures for each, for example owning two-thirds of Ogilvy, 47.5% of Mindshare and 49% of JWT.

Connaghan said the deal will consolidate these existing partnerships across the board.
“It evens out the shareholding and takes out any ambiguity that did exist … and puts everyone in every single business on the same footing and we think that is again, a huge benefit of this transaction taking place.”

The deal is still subject to approvals including those of the competition watchdog, but the group doesn't anticipate any issues. “We will be the largest, but we still remain a minority in a very competitive market. There's all the other big international groups such as Omnicom Group, Publicis and Havas, and also a very diverse local ecosystem of agencies in Australia and New Zealand, so we don't anticipate any problems in this area,” he said.

On reduced headcount:

Despite anticipating $15 million in cost savings and efficiencies, it is claimed this will come from “functions not head [count]”. CFO Lukas Aviani stated that reducing head count was not on the agenda for the merged group in the immediate future, with the majority of the beneficences coming from corporate and administration costs such as procurement, recruitment, insurance and travel.

“At the moment we have no heads floated to depart as a result of the $15m so [reducing headcount] absolutely not part of the synergy equation,” he told AdNews on the investor call.

On local leadership and a new name:

The newly merged entity will be the primary operating vehicle for WPP in Australia, which will, according to Connaghan, create “far and away the most powerful marketing and comms group in this part of the world”.

The merger proposes changing the name of the STW Group – subject to shareholder agreement – but it's not yet clear what that will be. Connaghan said today that it hasn't “thought that through” yet, and anticipated that it would be unveiled around March or April 2016.

“We'll be working through that [name change] but it makes a lot of sense in that STW and WPP coming together is now a very different business to what it was yesterday,” he said.

Connaghan was quick to point out in response to questions that in this region, agency networks with strong local oversight are some of the most successful, to highlight the role that the local leadership from STW Group will play in making the new entity successful.

On delivering customer experience, competitive advantage and scale:

Customer experience, and delivering 100% of clients' needs in that area are the cornerstone of the deal. STW highlighted the evolution of its business from advertising, to marketing to customer experience moving from its goal of delivering 100% of clients' advertising needs when it first formed, to providing 100% of clients' marketing needs in recent years - and now to delivering 100% of customer experience needs, demonstrating how the group and its capabilities have changed.

WPP has its strength in this region in media through GroupM and through research and data with companies such as Millward Brown, whereas STW's strengths lie in advertising, digital and PR specialists. The coming together of the two has “balanced” the portfolio and will also allow STW's business to compete on a scale that it could not have done as an Australian organisation. But with the grunt of WPP behind it, it can offer more competitive advantage, it claims.

“Balancing our portfolio really makes a much stronger group and our clients will get the benefit from that strong local market knowledge. We don't think anyone understands Australia and New Zealand as much as STW does and now we'll have open access to the best thinking from WPP from all around the world. WPP is investing a large amount of money in research, data innovation, and the new digital economy. Here in Australia and new Zealand we could never match the kind of scale that WPP brings. Now we will have access to that thinking.”

The STW Group will now also adopt the WPP philosophy of “horozontality”, by which it means accessing tools, talents and capabilities across the group to drive value for clients.

On challenges the group could encounter:

On questions about the recent MediaCom client scandal, in which reporting discrepancies were unearthed across brands such as, Foxtel, Yum! Brands and IAG, Connaghan said STW was “contractually protected” [against any potential future flare-ups that could impede STW], that the individuals who were involved have left the business and that under MediaCom's new management, it is set to “have a much better year” in 2016.

Connaghan backed the new leadership in place at GroupM and MediaCom following the appointment of former McDonald’s CMO Mark Lollback as group CEO on Friday, and Sean Seamer the recently installed CEO of MediaCom.

The numbers:

  • 61% the majority stakehold that WPP will take in STW Group
  • $512m: The figure the deal values the merged organisation at
  • $0.915: The price each new STW share issued for 
  • 423m new shares issued valued at $387m
  • $125 million: additional net debt taken on by STW to fund the deal
  • 30%: the premium on shares (based on the 10-day VWAP)
  • $847 million: dollars in combined revenue for STW and WPP 
  • $15m in cost efficiencies 
  • 11: the number of board members, six will be from WPP. Plans to reduce 

Have something to say on this? Share your views in the comments section below. Or if you have a news story or tip-off, drop us a line at adnews@yaffa.com.au

Sign up to the AdNews newsletter, like us on Facebook or follow us on Twitter for breaking stories and campaigns throughout the day.

Read more about these related brands, agencies and people

comments powered by Disqus