The Lowdown: Will Cordiant's Boss Be Back after the Break? ; Michael Bungey Is Used to Getting out of Scrapes, and He'll Have to Do It Again at the Troubled Ad Group. Heather Tomlinson Reports
Tomlinson, Heather, The Independent (London, England)
When Cordiant Communications reports its half-year results this Friday, it is unlikely the champagne corks will be popping. Turnover at the advertising and marketing group is expected to be down around 11 per cent, and the prospect of more cost-cutting measures is becoming increasingly likely.
However, should shareholders be offered a glass of bubbly, they might drink deep as they recall the track record of chief executive Michael Bungey and his experience of coming through tight financial scrapes. When he ran his own advertising agency two decades ago, and the piggy bank was almost empty, he had an unusual solution. He used the last of the money to throw an upmarket champagne party, inviting the great and good. The event went well, and four of the guests ended up becoming clients, so saving the company.
Cordiant may not be bankrupt. But it could do with an extra client or four. Times are hard for ad agencies because companies have become less keen to advertise over the past two years, and competition for clients is now fierce.
At Cordiant, the pain has been exacerbated by a hangover from an exuberant acquisition spree. In 2000, when economic times were better and prices were high, the company spent pounds 279m buying Lighthouse Global, the owner of PR firm Financial Dynamics, and pounds 113m on Healthworld, a healthcare consultancy. It also forked out pounds 32m for MicroArts Corporation, an American e-commerce consultancy whose performance since then has mirrored the rest of the dot-com sector.
Burgeoning debts from the Lighthouse purchase have already forced the company into a humiliating concession to its banks, when the terms of its loans had to be renegotiated earlier this year. The interest rates were hiked up and the banks now control dividend policy and the use of cash in the business. Meanwhile, some analysts think the company won't be able to stick to the new loan terms.
"Our big concern is that Cordiant will breach its banking covenants shortly," says Johnathan Barrett, media analyst at stockbroker Teather & Greenwood. "We have seen a major deterioration in the advertising market since the refinancing, and any loss of revenue is felt very quickly."
The company officially denies this is a risk, though some insiders are less certain. Similarly, after a series of profits warnings last year, and a miserable trading update in June, investors are not optimistic. Some say the only hope is a bid from a rival ad company. But there have been expectations of this for the past five years, which have never been realised. Mounting gloom has brought the share price down: in the past few weeks it has reached an all-time low of 49p.
The share slide has attracted eagle-eyed investors, though some are not welcome guests. The corporate raider Active Value, run by Julian Treger and Brian Myerson, has decided the company is easy prey and has built up a 9 per cent stake. It is believed that Mr Treger and Mr Myerson intend to increase their holding, call for an emergency general meeting and push for management changes.
They have yet to win the hearts and minds of other shareholders, and some observers question their rationale. "Due to agencies' heavy cost bases, they need to be run particularly well financially to make them capable of dealing with downturns," says Mr Barrett. "To turn Cordiant around would require time. …