Advertising group WPP is weighing up a £500 million rights issue to fund its proposed acquisition of American rival Grey Global. WPP chief executive Sir Martin Sorrell confirmed last week that it is examining Grey's books ahead of a possible bid for the group, the world's last remaining independent ad agency, which is being auction off by Goldman Sachs.
Sorrell told analysts last week that a bid for Grey, valued at about $1 billion, could be easily financed and that Grey could be absorbed without difficulty, although he stopped short of saying he would make a bid. WPP is conducting due diligence and Sorrell declared he was 'very impressed' with Grey.
The deadline for first-round bids has slipped and offers are unlikely to be submitted until the end of the month, according to sources close to the bid process. WPP has a market value of £5.7 billion, about 10 times that of its smaller competitor.
'The market's assumption is that he'll buy it and there will be equity issued,' said one industry analyst who took part in a conference with Sorrell on Friday. WPP announced a strong set of interim results last week, revealing a near-15 per cent rise in pre-tax profits to £176.3m. Half-year turnover topped £2bn for the first time and Sorrell confirmed that the long-awaited advertising upturn is feeding through to the bottom line on the back of higher corporate spending on the Olympics, Euro 2004 and the US Presidential elections.
WPP's largest investors, including Legal and General and Legg Mason, are understood to be relaxed about the prospect of a rights issue to fund the acquisition, although there is some unease in the City over the amount WPP could be forced to pay if the number of bidders rises. French group Havas is considering a bid, along with several American private equity houses.
Grey's clients include consumer products giant Procter & Gamble. Grey is not a perfect strategic fit for WPP, which would prefer to buy businesses in fast-growing markets such as south east Asia, but Sorrell rarely passes up a chance to buy a rival. Some analysts, however, said a bid is not inevitable. 'Our view is it's a "nice to have" but it's not a "must have". He could buy it but he could yet walk away,' said one.
WPP's shares closed down 1.3 per cent on Friday at 488p.
