POG Merger 'Unlikely' To Go Through, Sorrell Says

WPP CEO Martin Sorrell told analysts Friday on a conference to discuss first-quarter financial results that he thinks it is “unlikely” that the merger of Publicis Groupe and Omnicom Group will be completed.

Sorrell noted both companies’ statements over the past two weeks acknowledging publicly the real possibility that the deal could collapse if certain tax-related approvals were not granted in both France and the UK.

But the WPP chief characterized the recent statements from the proposed merger partners as “camouflage” designed to disguise certain “social issues” that are also bogging down plans to integrate the two holding companies.  Those issues include how the media operations of the two Adland giants will be organized and who will run them; who the CFO of the merged company will be, and whether digital operations will be run out of New York or Paris.

That said, Sorrell added that he believes the merger as currently structured would give WPP “more opportunities” over the next three years than if it doesn’t happen. It will take that long for the merged entity to develop and implement an integrated strategy, he said. That will create concern and uncertainty among clients, some of whom would likely look elsewhere for marketing services.

While Omnicom CEO John Wren said earlier this week that the inability so far to obtain exclusive tax residency in the UK was “very unexpected,” Sorrell said it should not have come as a great surprise, unless the companies were willing to move “substantial portions” of their businesses to the UK.

“The atmosphere in Europe has tightened regarding tax avoidance,” he said. To get the concessions the merger partners are looking for he said, they will have to “move material parts of the organizations” to the Netherlands or the UK, perhaps including having the CEO and CFO of the new company relocate to those locales.

Meanwhile, WPP reported a first quarter revenue increase of 1.5% to 2.57 billion British pounds ($4.32 billion at Friday’s exchange rate). Currency fluctuations negatively impacted reported revenue growth by more than 8%, the holding company said.  It posted 7% organic revenue growth in the first quarter, up sharply from the 2.1% growth rate achieved in the first quarter of last year.

Organic growth in North America was 9.3% and in the UK reached 10.7%, while Western Europe showed improvement with growth of 4.2%. Organic growth around the rest of the world averaged about 5.2%.

By business sector, advertising and media investment was the strongest performer, with organic growth of 13%. Branding, health care and specialist communications posted growth of 5.1%.

Net new business totaled $1.275 billion, down 15% from the prior-year period. Wins included the $100 million global Tiffany’s account and the $120 million Papa John’s U.S. assignment. Losses included Con Agra ($135 million) and HTC ($78 million.)

Sorrell said that that the company will continue to spend heavily on Google -- probably $3 billion this year up from $2.5 billion in 2013. The relationship between the companies is “more positive” than it had been a few years ago, Sorrell said. Video and mobile search are the company’s most “dynamic” channels right now, he added.

The company will spend more on Facebook this year, probably $650 million, versus the $480 million it spent last year. While there is no guaranteed spending with the social media giant, Sorrell said that WPP is “better organized with them this year than ever before.” 

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