Omnicom (OMC) started a guessing game in its Q4 2010 earnings call by announcing that it would sell some ad agencies this year that bring in about $300 million in revenues. Neither CEO John Wren nor CFO Randall Weisenberger gave any clues as to which agencies were on the block. They did, however, imply that those agencies suck.
My prediction: One of the shops Omnicom wants to get rid of is the troubled Arnell Group. The parent company fired eccentric CEO Peter Arnell (pictured) earlier this month and replaced him with his wife, Sara. This, surely, is a corporate relationship that cannot be repaired.
The international ad agency holding company made $12.5 billion in revenues last year, so a loss of $300 million won't make much of a dent. But put another way, that $300 million in revenue could represent north of $3 billion in client accounts -- a significant chunk of business. (Generally, agencies earn as revenue about 10 percent at best of the total amount advertisers spend. At WPP (WPPGY), for instance, revenues are just 5 percent of total client billings.)
Here's what was said on the call:
Weisenburger: Also in Q4, we completed the sale of two small agencies in an ongoing strategic review of our businesses. We also expect to complete several additional divestitures and dispositions in 2011 beginning in the first quarter. The agencies that are currently under consideration for disposal have revenue of about $300 million, which is approximately equal to the revenue of our businesses that we've recently acquired.That piqued the curiosity of Craig Huber, an analyst for Access 342:
Huber: And then also you mentioned, you're looking to potentially do about $300 million of revenues to divest here throughout 2011 is your current plan. I'm curious what's the margin differential between the divestitures you're planning here versus the acquisitions that you've announced so far? Just a rough number between the two?This is an interesting question that isn't often asked. In advertising, margins are almost always thin and, on some clients, agencies will run accounts at a loss for periods simply to keep the business over the long term. If Omnicom is getting rid of some agencies, they must be chronically bad at making money.
Despite thin margins, ad agency holding companies are generally loathe to sell any of the agencies they acquire because even the lousiest shop has client relationships that can be leveraged into future new business, sometimes at other shops in the network. Sales of functioning agencies are extremely rare. The last one I can remember was when McKinney's management bought itself back from Havas (HAV) in 2008. A more infamous example would be when MDC Partners (MDCA) unwound its deal with the legendary Cliff Freeman & Partners -- maker of the "where's the beef?" commercials for Wendy's -- for just $800,000. Freeman went belly up months later.
Here's the answer of CEO Wren (pictured) to Huber's margin question:
Wren: I haven't sat and done that calculation.That's an odd statement for a man who's waving goodbye to $300 million. Weisenberger stepped in:
Weisenburger: Obviously, the companies that are in strategic review, let's put it that way, as opposed to planned divestitures, the companies that we're looking at and evaluating, they have lower margins. The companies that we've just completed the acquisitions of are very solid, very solid companies with margins at our, I'll say, at our average, maybe a little bit above our average. Above Omnicom's average. That could be a good gap between the two of them.Not very helpful. The recent acquisitions include such obscurata as Core, Excerpta Medica and DDB Colombia. That might imply that Omnicom will not be getting rid of any chunks of its big networks, which include BBDO, TBWA and DDB. (Having said that, parts of DDB -- i.e. Chicago -- have had a rough couple of years.)
One brand to watch will be Arnell. Adweek reports that the once-powerful Arnell now only has six clients left, following a period of four years in which Peter Arnell's outre behavior -- addicted to eating oranges and using his assistant's butt as a set of bongos -- did more to annoy clients than win them. Arnell was the man who redesigned the Tropicana orange juice box, a move that was scrapped when PepsiCo (PEP) belatedly realized that everyone loved the old box.
Given that Peter Arnell is now suing Omnicom to retreive his personal collection of junk (which he values at $1 million) from his old office, it's hard to see why Omnicom would want to maintain Arnell sans Arnell on its books.