MDC Partners stock fell nearly 15% today after BMO analyst Dan Salmon downgraded the company due to weakening account activity and visibility.
In his report, Salmon cites accumulating account losses, including Coors Banquet (72andSunny), U.S. creative work for Nestlé's Digiorno, Nescafe, Clasico and Taster's Choice brands (Doner), and creative work for Kraft Mac & Cheese and Hershey (Crispin Porter, estimated billings of $50 million and $450 million, respectively).
Salmon also cited a spike in accounts in review at MDC shops. These include Coors Light's creative account at 72andSunny (the agency reportedly won't defend and has announced staff cuts in NYC and LA).
By BMO's analysis, MDC is also at risk on Paypal's global creative account (estimated $180 million of billings) and Johnnie Walker's global creative account (estimated $80 million of billings), says the report.
"With our confidence in the business turning around now lower, and leverage still high, we can no longer recommend shares and move to the sidelines," he writes.
However, Salmon does believe there is more long-term value in MDC's core agencies than the current enterprise value embeds.
MDC is expected to provide more of a financial update on Friday during the company's earnings call to discuss fourth quarter and full-year 2018 results.
That call follows reports last week that Mark Penn’s Stagwell Group is discussing a possible $100 million investment in MDC and that Penn himself could end up leading the company. One source says that MDC has realized that the network has concluded that it isn't going to receive its preferred billion dollar-plus sale price for the whole company and is now more willing to negotiate a smaller transaction.
Talks with Stagwell follow reports a few months back that Accenture Interactive, Deloitte and Bain Capital expressed interest in acquiring the company. But sources say the company’s $1 billion-plus debt proved a major obstacle to a deal and that the Stagwell talks are the most advanced now.
Meanwhile, MDC is continuing to prepare for a June 4 shareholder meeting that will also
serve as a special meeting to vote on a proposal to replace three board members. The “special meeting” segment of the gathering was a result of FrontFour Capital Group's effort
seeking new management and board representation. The hedge fund has been pushing for leadership changes at least since summer 2018, according to a November filing. The firm said it believes changes are needed to boost value for shareholders.
MDC has countered with an "advance notice by-law," establishing a framework requiring advance notice for the nomination of directors by shareholders of MDC Partners. This advance notice by-law was effective immediately and will now be presented to shareholders for confirmation at the June 4 meeting.
Separately MDC says it is continuing with its search for a new CEO. The last CEO, Scott Kauffman, vacated the post at the end of last year and now it appears that the search is linked to a potential investment by Stagwell.