Pivotal's Wieser: Investors Should Bet On POG Merger
While many Adland investors don’t “fully appreciate the strategic advantages” that will flow from the pending merger of Omnicom and Publicis, Pivotal Research analyst Brian Wieser said today he was maintaining buy ratings for both companies.
“Our view remains that few marketers are likely to depart agencies at Publicis or Omnicom because of the merger,” Wieser wrote. “While we're aware of recent industry surveys which indicate marketers viewing the transaction in a negative light as well, our own recent conversations with large clients of the holding companies highlighted that so long as marketers feel their confidential data is protected and that the people they want to work with remain attached to their account, they will generally have no problems with the merger. “
“Further, we think that expectations of reduced media pricing or enhanced levels of rebates from media owners returned to the marketers will help offset concerns around agencies' abilities to establish pricing power in the services they offer.”
That said, Wieser has also tempered his view on just how quickly further industry consolidation will follow. While it is still a top-of-mind issue for Adland, and the Interpublic Group seems like it would fit nicely within the portfolio of a larger holding company, don’t hold your breath for a near-term deal, Weiser wrote in a separate report on IPG Tuesday.
Wieser said IPG remains his favorite holding company stock, with a $22 target or 28% upside. And that’s based more on the company’s current “core operations” and less on its potential as an immediate takeover target.
That’s a bit of a shift in Wieser’s outlook from this summer in the wake of the announcement that Omnicom and Publicis would merge, prompting speculation about a new round of industry consolidation. After the announcement, Wieser wrote that he doubted that IPG would “continue as an independent entity,” and concluded that Dentsu would be its most likely acquirer.
That could still happen, eventually. But Wieser wrote that “given our updated interpretation of comments from management at both of Dentsu and WPP, we are coming to see that there is no immediate catalyst” for a holding company-sized acquisition by either company. “Thus investors looking to capitalize on the very real M&A potential embedded in IPG in particular will need to be prepared to wait.”
But beyond its potential value as an acquisition candidate, Wieser said that “IPG looks good given a solid new business record in recent periods and an ongoing commitment to margin improvements. Consequently, we continue to recommend holding IPG as strongly as before for investors with longer-term time horizons, based both on the ongoing turnaround (which we think is going well) and the potential from M&A.”
Wieser believes that IPG will generate 2.7% organic revenue growth for full-year 2013, which is within the 2% to 3% guidance that the company has issued.