Zenith Offers Glimpse Into Market Value Of Media Shops

WPP Group's sale of its 25% stake in Zenith Optimedia Group to controlling shareholder Publicis is providing a rare public look into how big agency holding companies value their media operations. While the companies don't normally break out the profitability of their media shops, WPP disclosed that Zenith Optimedia had audited revenues of $236 million and post-tax profits of $21 million in 2002.

With reported 2002 billings of $16.15 billion, that means Zenith Optimedia earned only a 1.5% rate of commission on the media billings it processed last year, which would be far lower than what assumed rates of media commissions are for the industry at large. Of course reported billings don't necessarily correlate to actual billings, or to commission rates for handling them.

Nonetheless, the disclosure also establishes a crude basis for comparing the theoretical market values of all agency media units. The $119.5 million Publicis paid for WPP's 25% stake in Zenith Optimedia equates to a $478 million value for the entire unit. That take out value would amount to 2.96% of reported 2002 media billings.

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Using that 2.96% billings multiple would suggest that other biggies might fetch considerable sums if they were sold or spun-off from their holding companies. On that basis, Zenith Optimedia sister unit Starcom MediaVest Group would be valued at $545 million, while WPP's MindShare would be valued at $533 million (see table below). Havas' MPG unit, the smallest of the top 10 media agencies, would fetch $253 million.

That, of course, assumes a straight market valuation with no run-ups from competitive bidding, which according to Abe Jones, a principal of investment banker AdMedia Partners is more than likely to occur.

Jones said the 2.96% billings multiple was "in the ballpark, but the real question is how profitable Zenith is." He said that media agencies tend to reap similar multiples as full-service shops when they are bought and sold, "about four to six times pre-tax profits."

While neither WPP nor Publicis revealed the pre-tax profits of Zenith Optimedia, the deal was worth 23 times post-tax profits and two times revenue.

However, its believed that the Zenith Optimedia buyout deal was pre-set and structured at a time that may not have accounted for its current profitability.

"It might well be worth more if the whole company were on the market," said Jones, adding, "It's probably fair to say if the company were up for auction it could fetch a higher price, if only because of a scarcity value that would be attached to a company that large. A firm like Havas that has a modest media agency, for example, if they had the opportunity to buy Zenith, I'm sure they would pay a market price for it that would be higher than the valuation."

Media Agency Market Valuations*


Media Agency Billings** Market Value
Starcom MediaVest $18.40 billion $545 million
MindShare $18.00 billion $533 million
OMD $17.90 billion $530 million
Initiative Media $16.85 billion $499 million
Carat $16.65 billion $493 million
Zenith Optimedia $16.15 billion $478 million
Universal McCann $14.95 billion $443 million
Mediaedge:cia $13.55 billion $401 million
MediaCom $12.35 billion $366 million
MPG $ 8.55 billion $253 million

Source: Advertising Age's 2003 Agency Report, **RECMA billings data. *Derived from a 2.96% billings multiple based on WPP Group's market valuation of its 25% stake in Zenith Optimedia Group.
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