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 The French group is hoping rapid growth in both North American and
internet advertising, which are far outpacing European and
traditional ad formats, will help it catch up with sales gains at
rivals such as WPP and Interpublic.
Chief Executive Maurice Levy has blamed Publicis' recent poor
performance on a failed merger with world No.2 ad agency Omnicom,
announced in August 2013 and abandoned in May over control and
cultural clashes.
But some analysts said Publicis' offer of $25 per share, a 44
percent premium to Sapient's closing price on Friday, was a hefty
price for a company whose growth may have peaked, and that the deal
could also dash hopes among the French company's shareholders that
cash might be distributed to them.
Publicis shares fell as much as 5 percent in early Monday trade.
They were down 2.6 percent at 1128 GMT, the biggest fall on France's
blue-chip CAC 40 index.
"A good asset at a steep price," said Exane BNP Paribas analyst
Charles Bedouelle of the deal, adding it would "likely push back (Publicis')
cash return story by two years."
UBS analyst Tamsin Garrity said Publicis had been under pressure
from investors to return cash, and was expected to announced share
buybacks at a strategy day on Friday.
"The acquisition of Sapient makes such returns unlikely," she added.
Garrity has a neutral rating on Publicis shares.
Levy defended the decision, saying the company would generate more
value in the long term by buying Sapient rather than buying back its
own shares. He pledged to update investors on his approach to
dividends and buybacks sometime in November.
"This operation is extremely important for securing the future of
Publicis," Levy said. "It is far better to invest and deliver a
higher growth and higher profits ... which will lead to a re-rating,
rather than simply buy back our own shares."
"The deal will create a foundation for accelerated growth" by giving
Publicis access to new markets and revenues, he added.
Publicis said the deal would be financed through existing cash and
new debt, and would not affect Publicis' credit rating. It did not
say when it would add to group profits but forecast 50 million euros
($63 million) in annual cost savings.
"A JILTED LOVER"?
Sapient's sales grew 14.1 percent to 1.1 billion euros last year,
far outstripping Publicis' sales growth of 1.2 percent, though the
French company had a higher operating profit margin. The U.S-based
group earned 63 percent of its 2013 sales in North America and has
13,000 employees, 8,500 of which are in India.
"The risk that growth slows at Sapient is one of the transaction's
more important considerations," said Pivotal Research Group analyst
Brian Wieser.
He noted the deal gave Sapient an enterprise value (equity plus
debt) of around 12 times its forecast earnings before interest tax,
depreciation and amortization (EBITDA) for 2015, far above Publicis'
current multiple of about 8 times.
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Martin Sorrell, the chief executive of Publicis' rival WPP, was even
harsher, telling financial blog Business Insider that Publicis had
rushed into the Sapient deal to compensate for its botched marriage
with Omnicom.
"It looks like the behavior of a jilted lover," he said.
Buying Sapient will speed Publicis' roughly seven year-old effort to
earn more revenue from digital advertising, which includes
everything from online marketing to brand building on social
networks and automatic ad buying for major customers.
Last year, 38.4 percent of Publicis' sales came from digital, and it
had been aiming to reach 50 percent by 2018, something that the
Sapient deal will make happen immediately.
According to Zenith Optimedia, the digital ad market is expected to
grow 17.1 percent this year, driving total ad market growth of 5.3
percent.
Sapient's main SapientNitro unit is a digital agency on a par with
Publicis' Razorfish and WPP's AKQA with customers including carmaker
Fiat, retailer Marks & Spencer, and consumer goods group Unilever.
Sapient also has a technology consulting business serving government
and banks, which brings in a third of revenues but is less
profitable than the ad business.
Publicis' management and supervisory boards unanimously backed the
deal, as did the board of Sapient, which will recommend shareholders
tender their shares. As a result, Sapient will be de-listed from the
Nasdaq stock exchange.
Sapient boss Alan Herrick will continue to run the company and join
Publicis' management team, while Jerry Greenberg, the co-chairman of
Sapient's board will join Publicis' board.
The transaction is expected to close in the first quarter of next
year. Citigroup <C.N> has committed to financing the bid.
Bank of America Merrill Lynch and Rothschild advised Publicis, while
Goldman Sachs and Blackstone advised Sapient.
(Editing by David Clarke and Mark Potter)
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