Ad Agency MDC Partners Could Be for Sale, Deutsche Bank Says -- Let the Bidding Begin

(MoneyWatch)  MDC Partners (MDCA), the ad agency holding company that owns Crispin Porter + Bogusky and Kirshenbaum Bond Senecal + Partners, could be sold to either Havas or Dentsu if the price is right, according to Deutsche Bank analyst Matthew Chesler.

Chesler initiated coverage of MDC with a "buy" rating based on the company's free cashflow, its new dividend, the turnaround in the ad market and its mix of digital offerings. But he also took the opportunity in a slide show and a lengthy note to investors to suggest that MDC is a takeout target for larger networks. Shares ticked up to $8.87 at the close, from $8.72 the night before. Chesler thinks they should be worth $11.

An MDC buyout is not Chesler's main thesis, nor does he recommend the stock for that reason. However, in a side note low down in his analysis he speculates that the company could eventually be a takeout target "at the right price."

Here's his shopping list for buyers interested in MDC:

Attractive M&A candidate

• 34% digital exposure
• Solid collection of assets (e.g., CP+B)
• One of only groups with scale remaining
• $13m of corporate costs would go away
• Motivated sellers
• CEO is largest shareholder (fully-diluted basis)

Why now?

• Simplified, stronger balance sheet
• Call center business now only 9% of revs
• Remaining earnouts mostly satisfied
• Business already in hands of 2nd and 3rd
• generation management

Best fit with--

• Dentsu (Hold: DB analyst Takayoshi Koike)
• Havas (Hold: DB analyst Patrick Kirby)

CEO Miles Nadal owns 11.5 percent of all MDC's shares, Chesler says, and is thus likely to become stupendously rich if anyone were to acquire the company. Chesler also said that he believed MDC had been on the block for some time:

While we do not recommend that shareholders own the stock wholly for a take-out, we do believe that management's willingness to sell is high...at the right price. While we observe that MDC remains independent despite reportedly being open to selling for some time, we also note that it has become a more credible organization now, with industry balance sheets being stronger, and the re-opening of media M&A market. In our view, the environment for a sale of MDC is very favorable.

If MDC were bought, it would also make Alex Bogusky, Rich Kirshenbaum, Jon Bond and others wealthy beyond the dreams of their underlings. As you can see on page 13 of this analyst presentation, they're currently owed their share of $67.5 million in earnout fees for selling their shops to MDC. (They'll get that money even if MDC isn't sold, by the way.)

Related:

• Sprint Moves Call Centers Offshore; 1,664 Jobs Gone at MDC's Telemarketing Unit
• Q&A With MDC Partners CEO Miles Nadal
• MDC Partners to Continue Axing Jobs; 1,300 Gone So Far
• 163 Laid Off at Accent Marketing, the Agency That's a Big Chunk of MDC Partners' Revenues
• MDC Paid $1.4M for Attention Partners; Deal Illustrates Tax Strategy
• MDC's Crispin and Kirshenbaum Lose Accounts as Obligations to Partners Increase