S4’s Sir Martin Sorrell outlines audit delay comeback plan
In the wake of S4’s long-awaited results, Sir Martin Sorrell talks to The Drum about competition with holding company rivals and his amended expansion plans for the year ahead.
Sorrell discusses impact of S4’s audit delay / The Drum
S4 Capital’s annual results ran an analyst’s gauntlet when they were released on Friday. The earnings report was delayed twice – by over a month – after auditors PwC said it wasn’t able to sign off on the results, causing the industry observers who were questioning executive chairman Sir Martin Sorrell last week to fixate on the reasons for the delay.
The ”unacceptable and embarrassing” pause, as Sorrell put it, wiped a third from the company’s share price and has stalled its acquisitions strategy for the time being. It also obscured an otherwise promising set of numbers for the firm, showing organic growth of 63% over the last two years.
By the end of the day, S4’s offering appeared to have pleased the market gods, with its share price up and Citi analysts satisfied with the its explanation of the hiccup, which was put down to legacy accounting issues at Media.Monks.
Audit delay
Though the company’s share price will take time to return to its previous position, Sorrell tells The Drum that while it is ”always very difficult to know what clients are thinking,” it hasn’t hurt any relationships. Despite the delay, he says its own relationship with auditor PwC has ”actually been quite constructive through a difficult time, to be fair”. He says: ”It hasn’t been a fractious relationship, it has just been trying to work together to get things done.”
It has, however, choked the pipeline of target acquisitions. S4, through cornerstone agency Media.Monks, has grown massively since it was founded by Sorrell in 2017. Spurring that growth were generous offers of cash and shares in the parent company to agency founders. But despite an enormous loan backed by Credit Suisse and Barclays in 2021 that was earmarked as an acquisition war chest, that strategy depended on a strong share price. ”We had a couple lined up before the delay and they remain interested in doing things,” he tells us.
Those targets are agencies in S4’s favorite hunting ground – content production, data, digital media and technology services. But, he says: ”We won’t issue equity at these prices. The weighted average for the previous month was about 425p and that’s the price at which we would do deals if there were deals to be done.”
Tech services
When its stock does rise once more above 425p, technology services are sure to be its major focus. Following its takeover of Zemoga, in 2021, the firm launched a dedicated pillar for that sector and it’s a key part of future growth plans.
”It’s at a small scale, but it has grown very significantly and will continue to do this year. I would expect it to grow this year by at least a third; we’ve given guidance of 25%.
”I’m particularly interested in building our tech services business because it’s a strong base that we’ve got and a strong opportunity for us.”
Of particular interest will be agencies with major private equity investments, given the influx of firms willing to part with their stakes (think Engine, recently acquired by Next 15 from a private equity backer in the US). ”There are some things going on in that market, where people seem to be keener to sell than before.”
In new business, S4 is targeting the big advertisers currently in hock with Sorrell’s bete noir, the holding companies, as well as expanding accounts already held with clients such as Google and BMW. The recent tech services investments from Publicis and WPP, he suggests, have produced ”a lot of heat, but no light,” saying that ”every day there’s a press release but no results”.
”Where’s the beef?” he asks.
Economic anxieties
Inflation may drive Media.Monks and its agencies to bump fees (something he says clients are ”willing to discuss... they’re not impervious or oblivious to pricing”), but it needn’t be a major brake on the company’s activities. ”Inflation is something we’ve worked with, lived with, for many years. Digital [worker] wages have been rising for some time, but the biggest inflation has not come from digital wages but from levelling up – in other words, compensation for women, for Asian Americans, for Black and African Americans, for Hispanic staff. That’s to be applauded and welcomed.”
The Russian invasion of Ukraine, however, has prompted a stronger response.
Of the 86 staff it has in the country, approximately half have left, with those who remain living west of Kyiv where the situation is ”not as high risk as in the east, but still risky”. That operation, set up to service clients in Ukraine, has been redeployed, as have the 10 employees inside Russia.
In response to the war, Sorrell indicates that S4 has refocused much of its expansion activity away from central Europe towards Asia Pacific, the Americas and the Middle East. ”The war in Ukraine is having a significant impact on geographical risk. So risk is off in central and eastern Europe because of political concerns and security concerns. Risk is on – which means more activity – in Asia Pacific, maybe with the exception of China because of the question mark over Taiwan. But for India, for Indonesia, for Vietnam, for the Philippines, for Malaysia, you’ll see more activity.”
His proposal (mooted in a letter to The Times earlier this year) to move S4 from its mooring on the London Stock Exchange has been ditched for the moment, he says. ”Even though the markets have compressed and even though valuations have come down, it is still true that companies like our own are more highly valued in the US.”
The executive chairman is still keen on the idea, but the technical costs are high. Several of S4’s institutional shareholders would need to divest in the event of a trans-Atlantic shift, for example, which means S4 would have to help them find new buyers for their stakes (a process known as ’flowback’).
”I still think that, in the long-term, there’s a home for us in the US – preferably though a reverse into a US business. Let’s say we found a company with a similar philosophy with management we could get along with – not like Publicis or Omnicom, where you couldn’t sort out the social issues. If you found somebody like that, I still think that’s the best route for us.”