Q&A With MDC Partners CEO Miles Nadal

Miles Nadal, CEO of MDC Partners (MDCA), recently invited BNET into his Manhattan office for a chat about the state of his empire, the fourth-largest U.S. ad agency holding company (behind Interpublic, Omnicom and medical specialist InVentiv).

The owner of Crispin Porter + Bogusky and Kirshenbaum Bond Senecal + Partners started with $500 borrowed from his Visa card to buy a camera in 1980. He parlayed that nascent photography business into a series of acquisitions, most recently a 51 percent/$1.4 million stake in social media agency Attention Partners.

Nadal says MDC is poised for growth following the recession. He predicted year-on-year revenue growth in the fourth quarter of 2009, and said CP+B's relationship with Burger King (BKC) was "terrific" even though the client is engaged in a civil war with its restaurant franchise owners and chief marketing officer Russ Klein recently resigned from the company under mysterious circumstances.

When asked about Burger King, Nadal said, "Our relationship is terrific." He also praised Klein: "Russ Klein was an amazing client, a thought leader and enabler that enabled CPB to do great work -- some clients would not have been as inclined to be as irreverent or forward thinking. -- He will surface again in a high profile role."

But Nadal said he did not know why Klein resigned: "I have no idea."

Nadal was bullish on revenues in the ad business, which after a disastrous year are poised to take off. "We're the only firm that said our revenues will grow in the fourth quarter," he said. He noted the company recently announced it would pay its first ever dividend to shareholders: 25 percent of free cash flow. The dividend comes because MDC restructured its debt to allow such payments.

MDC's business has walked something of a knife's edge all year â€" its Q3 net income was just $2.2 million on revenues of $134 million and the company owes its agency bosses earnout payments of $67.5 million through 2011. Nonetheless, Nadal said the company would buy more agencies. "We said we're going to be very acquisitive on our last call [with Wall Street analysts]."

Nadal said the credit crisis was not over for smaller companies that may be growing but can't get debt facilities to improve their cashflow. "We're finding very good businesses that can't get support from banks, they have difficulty making payroll, getting cashflow."

And finally: Nadal addressed the "goodwill" that MDC carries on its balance sheet. Goodwill is an imaginary dollar amount that describes the possible future value of an acquired company's cash flows, or the difference between a company's asset value and the price paid for it. BNET previously noted that MDC did not make any significant goodwill writedowns during the recession (even though other agency holding companies did so). Companies normally reduce goodwill as the assets they own decline in value, something that happens a lot in recessions. BNET also noted that MDC uses goodwill as a tax shield.

Nadal explained that a 2007 change in accounting law makes MDC's goodwill assets seem unusually large compared to other holding companies whose goodwill acquisitions occurred mostly before 2007. The advantage is that MDC's return on assets are higher, Nadal believes, because goodwill â€"- unlike equipment or property â€"- doesn't require upkeep. "We have an enormous shelter because we have tax deductible goodwill -- no material investments are required to drive profit from goodwill."

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