• by February 6, 2006

Merrill Lynch initiated market coverage of the Havas advertising network last week, and in its first report criticized the company as being "strategically subscale" and singled out the MPG media business unit as being particularly problematic.

In the report, Merrill Lynch analyst Toby Reeks gave Havas a neutral recommendation.

He said Havas's previous management had successfully restructured the company and grew its holdings through acquisitions, creating a period of stability and a solid strategy for the holding company's creative agencies. Those shops include Euro RSCG, Boston-based Arnold Advertising, and McKinney & Silver.

However, Reeks was less enthusiastic about media unit MPG and urged Havas to acquire London-based Aegis Group, the parent of media agency Carat, and presumably combine it with MPG in order to improve MPG's competitive position.

French financier Vincent Bollore's Groupe Bollore owns a dominant position in both Havas and Aegis, and recently increased his stake in each (MediaDailyNews, Jan. 24). He currently owns 25.36 percent of Havas and 25.47 percent of Aegis. However, Bollore has previously said he wants Aegis to remain independent.

The Merrill report acknowledged that a takeover of Aegis by Havas could be risky because the Aegis board and shareholders would presumably demand a cash buyout rather than accept shares of Havas as payment. Reeks also said in the report that if Bollore acquired all of Aegis, he should dispose of the company's research unit, Synovate.

Regarding the neutral stock rating, Reeks wrote: "We believe that the visibility on current trading, and therefore estimates, is very limited. Although the acquisition of Aegis may solve some strategic problems for Havas, we believe that the acquisition will carry a significant degree of integration risk."

An attempted acquisition of Aegis by Havas could encounter competition from another major player in the advertising and media industries-Publicis Group CEO Maurice Levy. At the recent World Economic Forum in Davos, Switzerland, Levy said he is also interested in acquiring Aegis and that an offer could be made as early as next month. Also, WPP Group CEO Martin Sorrell has expressed an interest in Synovate as part of his company's continued efforts to build its marketing research holdings.

Merrill also released reports on Publicis and WPP Group the same day as the report on Havas. Publicis, it said, was "on a roll in terms of new business" and was given an upgraded buy recommendation. WPP, meanwhile, was described in the report as "well placed strategically" and maintained its current buy recommendation.

In general, Merrill said it was generally bullish on the entire advertising agency sector and claimed that fears of agencies failing to become involved in digital communications were unjustified.

"Overall, we are positive on the agency sector, as we believe the bear case against owning the agencies has faded," the report stated. "Margin pressures are being more than offset by efficiency gains and the benign economic environment should ensure good advertising growth. Fears that the agencies would not participate in the shift to Internet/digital advertising currently appear to be overdone, as Internet/digital advertising is still a small proportion of the total and traditional agencies are increasing their exposure in this area. Market concerns over the acquisitive nature of the agencies remain, but have also faded."