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WPP - Sale of Kantar agreed

Nicholas Hyett | 12 July 2019 | A A A
WPP - Sale of Kantar agreed

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WPP plc Ordinary 10p

Sell: 979.80 | Buy: 980.00 | Change -10.40 (-1.05%)
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WPP has agreed to sell 60% of its market research business, Kantar, to private equity group Bain Capital. WPP will receive $3.1bn in cash proceeds.

WPP will use 60% of the proceeds to reduce debt, with the remaining $1.2bn returned to shareholders either as a dividend or as a share buyback.

The deal is subject to approval by regulators and WPP shareholders.

WPP shares were broadly flat following the announcement.

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Our View

WPP's come a long way since Martin Sorrell picked up a humble wire-basket manufacturer as a holding company for what would become world's largest media group. Unfortunately in recent years, the sprawling conglomerate's great weight has created aches and pains to match.

The loss of Martin Sorrell as CEO after 33 years leading the group, always made some underperformance a possibility. US sales continue to sink as major clients walk away, and the group needs to navigate an advertising market that's increasingly dominated by the likes of Facebook and Google.

Mark Read's new strategy calls for an extra focus on helping partners succeed on marketplaces such as Amazon and Alibaba. That seems sensible, as do plans to slim down the business by merging and disposing of surplus agencies and interests.

Kantar is the most recent sacrificial lamb. The market research division has attracted a sizeable, although not unexpected, price tag, and comes after several smaller disposals - including the sale of sports marketing agency Chime.

The disposals have clear benefits. Not only will they help reduce the group's substantial debt pile, they should help the new management get a grip of the business. Years of acquisition-led expansion under Sorrell saw WPP sprawl and a healthy balance sheet was lower down the list of priorities than we might have liked.

We think Read's turnaround plans make sense, and it's good to see profit expectations have so far remained stable. The challenges are significant though. The North American market is seeing sales slide at a much faster rate than at the end of last year, and goes some way to explaining why the shares trade on just 9.4 times expected earnings.

The prospective yield is around 6.2%, before any special dividend following the Kantar sale. With a large slice of the 'non-core' asset now out of the way, investors are at least being paid to wait and see whether the new team can deliver results from what remains. Although dividend growth looks unlikely to us.

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First Quarter Trading Update - 26 April 2019

Revenue less pass-through costs, WPP's preferred measure of underlying sales, declined 0.7% to £2.9bn. Ignoring the effect of exchange rates, sales were down 2.3%.

However, expectations for the full year were unchanged.

North America, WPP's biggest region, was the weakest performing geography. Revenue less pass-through costs declined 7.3% to £1bn, driven by a poor performance in advertising and health & wellness, following 2018's client losses.

In the UK, like-for-like revenue less pass-through costs was down 0.9%, a slight decline on 2018's full-year performance. Sales were down 1.1%. The challenging trading conditions were partially offset by a strong performance in the media investment management business.

A good performance in the PR division, and slightly better results in the important German market, helped offset challenging conditions elsewhere in Western Europe. Sales nudged up 0.2% to £765m.

The strongest performing region was Rest of World, where revenue less pass-through costs rose 2% to £867m. That was driven by strong growth in media investment management and data investment management.

Net debt fell by 14.6% to £4.2bn, following the group's disposals in the period.

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Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.