WPP’s move to take control of 100% of its Australian operations is all about efficiency and stretching the overheads of a global business.
The move also means that there will be fewer hard numbers to judge the state of the local advertising industry.
Currently WPP AUNZ, as an ASX-listed company, must report publicly its financials, at least half yearly and annually.
When rolled into the UK company, Australia becomes a unit in a bigger whole and, judging by other holding companies, the local operations may get the briefest of mentions during earnings updates.
But that consideration -- although it will mean a saving in administration -- had little to do with the decision to go after WPP AUNZ.
The pandemic sparked a hunt for cost savings at WPP, the world’s biggest holding company, to prepare for an expected deep downturn in economic activity.
But why then is the UK-based holding company prepared to pay about $230 million to mop up WPP AUNZ?
WPP already controls the local Australian company. The money it is spending only buys the 38.5% of the company it doesn't own. The market capitalisation of the local company today is $596.5 million at 70 cents a share.
The local stock exchange listing goes back to 2016 when Australian based WPP businesses were effectively backed into the ASX by taking over STW Communications.
This created the largest communications services parent company in the region with 90 plus businesses and more than 5,500 people.
Revenues then were a combined $850 million but have slipped since.
The UK-based WPP is buying at a low point, with sales down but with prospects for growth. And it will get a business with $70 million in costs stripped out in 2020. The benefit next year will be reduced overheads of about $50 million.
WPP AUNZ expects full 2020 financial year net sales to be between $607 million and $610 million, a fall of about 14% to 15% on 2019, but the prospects for 2021 and next year are better.
Back to the global holding company. With the dip from the pandemic, WPP plans to recover global sales over the next two years back to 2019 levels and then grow by 3-4% each year.
To do this the company needs to make each dollar work harder, with less duplicated effort across the world.
It’s all about consistency in the global operating model. Currently, Australia is structured and works in a different way to the rest of the WPP empire, although WPP AUNZ CEO Jens Monsees has been relentlessly working at simplifying the local operation.
John Rogers, chief financial officer at WPP in London, says the operating model is too complex.
“We've got over ten different approaches to how we operate at the country level,” he told an investor briefing in London.
“We've got a long tail of small agencies in unprofitable countries for example.
“We've got far too many management layers, duplication of effort across technology and production assets and so forth. And of course, significant, historically at least in 2019, travel and personal costs.
“Moving forwards, we want to simplify what we do, three clearly defined operating models by country, significant consolidation of local agencies, simplified organisational structures, standard platforms leveraging our scale, and of course, continuing to implement some of the changes that we've seen to our ways of working over the last nine months through COVID.”
Rogers sees about GBP150 million of savings.
And how those savings sit with other effiiciencies over time:
WPP began the process of simplifying its business about two years ago in response to slowing growth.
Mark Read, who took over as CEO of WPP from founder Sir Martin Sorrell, says there wasn't a strong vision, or purpose, or clarity of what WPP stood for.
“We had nine separate creative or digital networks that made the business very difficult to manage and probably more than 500 different brands across the company," he says.
“And our financial model was not sustainable. There was lack of discipline on how we allocated capital. Our dividend was approaching 60% of earnings and our debt was approaching GBP5 billion (AUD1.7 billion).”
Since then the company structure has simplified from 25 global networks, including Kantar, to 10. From 65 specialty businesses to 40. From 500 plus brands to closer to 220.
“We've done this by the process of merging and combining offices, shutting businesses that needed to be shut and raising GBP3.5 billion *(AUD6.1 billion) from disposals, most notably of Kantar,” says Read.
“We've raised GBP2.5 billion (AUD4.36 billion) and kept a 40% stake in Kantar at the end of last year. And that transaction on its own put us in a very strong position to prosper through the challenges of 2020 and COVID.
“So how can we enter 2021? I'd say having made significant progress, much of it during COVID. We haven't been sitting on our hands over the last nine months, but we've been taking action.
“We've seen an improved organic growth performance pre-COVID.
“Our new business has been stellar and our existing business at risk has been much lower than it has been historically.
“We have a much improved financial performance, and our net debt at the end of Q3 was down to GBP2.3 billion, but we've also, and I think most importantly, been taking a lot of action during this period to be ready for 2021.”
Read says client spend is holding up but is shifting.
Clients expect their marketing technology budget to increase. They’re spending more money on market technology than they do on traditional agency fees.
“So we need to continue to invest in those sort of shifting areas of the business, which is what we've been doing,” says Read.
“I see the opportunity is in digital communications. It's in experience, it's in commerce and it's in technology.”
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