Moody's Investor Service assigned a Baa2 rating to a €1.2 billion ($1.474 billion) senior unsecured note issuance by Publicis Groupe SA (PUBGY). Proceeds from the new issue are expected to be used to fund the buyout of Sapient Corp. (SAPE).
Sapient Acquisition
Publicis announced its intention to acquire Sapient for $3.7 billion early last month, in an attempt to strengthen its foothold in digital advertising and contend with rivals such as WPP Group and The Interpublic Group of Companies, Inc. (IPG). Publicis expects the deal to conclude in the first quarter of 2015, subject to regulatory approvals. The ad giant’s issuer rating was Baa2 with a positive outlook, but Moody’s changed the outlook to stable following the announcement.
The Sapient acquisition will be funded with cash on hand and new debt. In case the acquisition fails or does not conclude by Jun 8, 2015, Publicis can redeem these bonds in whole at a premium of 1% over the face value.
Ratings Rationale
The proposed €1.2 billion note issuance is comprised of a €600 million 7-year tranche and a €600 million 10-year tranche. The assigned rating for the issue is of investment grade and indicates the presence of moderate credit risk with some speculative characteristics.
At the end of the last year, Publicis' adjusted average net debt to EBITDAR (Earnings before Interest, Tax, Depreciation, Amortization and Restructuring) ratio stood at about 1.5x. However, incorporating the effect of the Sapient acquisition, Moody’s expects the same to weaken to 3.0x on a 2014 pro-forma basis. While the new leverage is consistent with a Baa2 rating, it restricts the potential for a ratings upgrade.
The Baa2 rating reflects Publicis’ consistent operating performance and its powerful position as one of the select few marketing communications companies with a global footprint. On the other hand, factors such as robust acquisition activity, susceptibility to cyclical economic downturns and intense competition from bigger rivals such as Omnicom Group Inc. (OMC) and WPP cast a negative impact on Publicis’ rating.
On the whole, Publicis looks well set to comply with its financial leverage targets over the medium term. Moody’s expects the company to acquire and integrate Sapient successfully.
Outlook
Publicis’ ratings could receive an upgrade if it exhibits sustained improvement in organic revenue growth and operating margin expansion. Also, successful and timely integration of Sapient, strategic targets being consistently met and sustained debt levels could have a positive impact on ratings.
On the other hand, the company’s ratings could receive a downgrade if its debt levels increase without a corresponding boost in earnings.
Separately, Publicis plans to carry out an early redemption of ORANE (compulsorily redeemable bonds into shares), subject to shareholder approval in May 2015. The repayment will be funded equally through treasury shares and share repurchases, and is expected to increase the company’s leverage slightly. Even so, Publicis is expected to adopt de-leveraging measures subsequent to the redemption.
To Conclude
The advertising services giant has had a troubled year, marked by the failure of its proposed $35 billion mega-merger with bigger rival Omnicom. Publicis’ sales growth has lagged far behind that of its peers as the company grappled with the distractions and complications caused by the merger plan.
However, the French conglomerate is trying to pick up the pieces and regain its growth momentum by way of acquisitions. Its recent buyouts include top Italian social media agency Ambito5, Canadian design consultancy Nurun, design firm Turner Duckworth and Berlin-based marketing agency Zweimaleins.
Publicis presently sports a Zacks Rank #4 (Sell).
Note: €1 = $1.2283
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