Will private equity more aggressively move into media and advertising?

The Media Leader Podcast

In a higher interest rate environment, businesses that can provide sustainable revenue and profit growth become more attractive to investors. And as investment opportunities have dried up, private equity has been looking at media and advertising as an increasingly interesting area.

Editor-in-chief Omar Oakes sat down with Rankin Creative CEO Richard Pinder — one of advertising’s most influential executives in recent times, with 30 years’ experience in a number of roles including five as chief operating officer at Publicis Groupe — to discuss how the changing market could attract more interest from private equity.

Listen to an excerpt of the episode or read a transcript of the conversation below:

Pinder: Interest rates are at 6-7% and inflation OK — still there, quite substantially, if not where it was… these numbers change the calculations pretty heavily.

One of the things they [private equity companies] do do, interestingly, is help cash-generative business reveal their value.

The advertising and media world that haven’t got themselves into too much debt, are highly cash-generative and quite low capital users are quite interesting businesses for private equity people to come into. We might see some interesting shifts in investors into our sector because we’re low capital users and high cash generators.

The Media Leader: And specifically which businesses do you think would be quite interesting [to such investors]?

Pinder: Well, I would never want to go head-to-head with Sir Martin [Sorrell] on any topic, having done so and having worked for him and competed with him, and I respect him enormously, but MediaMonks’ share price does lead people that I’ve been in meetings with to talk about that being an opportunity. Certainly, the last time I looked, it was 5-10% off its peak.

If you look at what’s happening with Vivendi and the discussion about would they be better off realising the value of Havas outside of that organisation, it doesn’t surprise me.

Even the other holding companies — Publicis, where I spent a bit of my time in the past — has really got all of its value out of the acquisitions that haven’t been creative or media. They’ve been digital and data.

That creates some quite interesting dynamics in terms of do you keep? Do you sell? Would other people be interested in investing? Because cash-generative, low-capital-use businesses are quite interesting in high-cost-of-debt scenarios.

The Media Leader: And what do you think that means for the advertiser when all this shakes out? Is it generally better or worse for the advertiser? Because I think if there’s more consolidation, that means there are fewer choices, there is an opportunity for people to put up prices on advertisers. Do you generally see it being a less competitive landscape going forward as there’s more consolidation?

Pinder: Well, yeah. I’m not a media buyer, so I don’t have precise data on the pieces, but I think we can see very clearly that there is already, if not a monopoly, a duopoly of the high-level tech ad purchase situation.

Forget the advertising industry holding companies — they’re sort of bit-part players compared to the big tech firms and their ability to garner extraordinary audiences.

We’ve all seen the YouTuber who we’ve discovered when they were going from 10,000 [subscribers] to 100,000 and have already hit a million. That growth — we haven’t seen in linear television in three decades. There’s media properties being built every day that are very high-value by those people. So I don’t think this changes that very much. And whether Vivendi sells Havas and someone else does a deal — I’m not sure that’s really going to affect our clients.

I think advertisers have a very different conversation. They’ve seen programmatic has had the balloon burst on it — whichever data you look at, it looks like more than half of Lord Leverhulme’s money’s being wasted on programmatic. So the idea of great storytelling and engaging audiences is going to start to see a lot more traction again.

There was a time when clients under pressure would be forced into “the data says…”. Now they have to balance “well, that data says…” [with] “but my gut says…”.

Most of those YouTubers are not data analytic freaks. They use the data to learn what their audience wants to see and they can exponentially grow that audience by using that data. Isn’t that what we should all be doing? Telling the right story using the data to help, not starting with the data.

The opaque short-term desires of private equity should concern all of us

The Media Leader: What do you think is likely to happen with private equity this year? In one of my columns I wrote towards the end of last year, I said I thought that private equity is something we need to watch really carefully because, when you look at it and take a step back, private equity actually has quite big positions across media and advertising nowadays. Talk about interest rates going up and the impact — do you expect to see a lot of activity and how so?

Pinder: I think it’s a really good question. I remember when I left Publicis, one of my first sets of meetings was with a lot of private equity firms and back then — and even probably five years later, when I had other conversations — there was quite a strong reticence to be involved in business where the assets were low, the capital was low. But they understand capital, they don’t understand people. And they didn’t know how to engage with folk.

I think what’s flipped it is two things: one is a dearth in things to invest in. There’s a huge amount of capital and nothing to do with it.

The Media Leader: They’re scraping the barrel and they’ve come to media and advertising.

Pinder: Well, that’s one way of putting it. I think what it means is they review their lenses they view things through, but I think particularly the cash-generative nature of a business like ours, which can easily lose money if you screw it up — but if you get them in the right place and the clients are coming, you can price competitively and deliver a decent return on a low capital base.

That cash-generative nature is particularly interesting in a high interest rate environment, when your business model is to buy things with debt. That’s the PE model. They put down a bid. They borrow the rest. And you have to pay off the debt as fast as possible and give them back a very high multiple to their investment, not necessarily to the total price. And you need cash generation to do that.

Publicis was the best, I think, of all the holding companies at cash generation. We were all focused on it and it’s one of the reasons why they can do all these huge acquisitions and pay them back so fast. And private equity has spotted it now.

I think private equity will get more and more interested in what we’ve got.

The Media Leader: Could that be as big as getting involved in taking a big position in a major holding company?

Pinder: I think it could be, yeah. Because of their value equations. If you look at Publicis, WPP, I think Omnicom as well — if you look at the net cost of acquisitions and the share price, and you look at the value add of the last 10 years, it’s not great.

There is an argument in quite a few of those cases that a different approach could yield a better result.

That normally is the preserve of financial engineers to come in and point that out and do something about it.

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