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Sorrell Between Rock, Hard Place as He Balances Debt, Stock and His Own Pay

Pity poor Martin Sorrell. Having pushed through a $95 million pay package for himself that depends on the performance of WPP stock, despite resistance from executive pay watchdogs, he now finds that stock sinking. It's lost about 5 percent since Aug. 5 among worries that the network is carrying too much debt.

This puts Sorrell in an impossible position: he can cure his debt problems by lowering the price of WPP stock further. If he doesn't the stock will sink anyway because of the debt overhang. Either way, that $95 million payout for outperforming his peers becomes ever more unlikely.

As BNET noted in April and on Aug. 12, WPP in Q1 2009 doubled its YTD net debt to £3.4 billion. Another £176 million is due this year and then a massive £850 million lump is due in 2010.

The FT put some flesh on that Friday. The article notes that one way for Sorrell to get rid of the debt would be to sell more stock:

A £500m placing, while unlikely, would dilute existing shareholders by about 7 per cent, UBS said.

Morgan Stanley agreed that WPP is a "potential candidate to rebalance leverage with equity". It forecasts WPP's net debt to reach three times earnings before interest, tax, depreciation and amortisation in 2010, double what its analysts say is the "optimal" gearing for an agency.

Diluting your stock, of course, drives the price down. And driving down the stock cuts Sorrell's pay. But does he have a choice? Perhaps not:
"Agencies hold client money as part of doing business, so clients might become jittery if they felt their agency's financial rating was under pressure," said Patrick Kirby, analyst at Deutsche Bank.
Don't count Sorrell out. He has several years to get that stock back into a position to make him a gazillionaire.
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