2011 was the year that Peter Scott’s Engine Group, owner of ad agency WCRS and PR firm MHP, showed signs of running out of gas but Scott says that trading has improved in 2012 and 35 per cent shareholder HIG Capital has promised £30m towards more acquisitions.
Chairman and CEO Scott (left) says he is planning major acquisitions in the US and China, focussing on creative advertising and digital. After that Brazil or India are on the menu although Brazil seems unlikely to happen before the first of its big two events, the World Cup in 2014. The Olympics follows in 2016.
Engine is a privately-held limited partnership and its preferred measure of performance is EBITDA, basically profits before the nasty stuff like ‘exceptional’ charges and bank interest are taken into account. Engine’s EBITDA figure for 2011 was £11.3m on revenue of £82.9m compared to £14.6m on revenue of £73.9m in 2010. This led to a statutory loss of £3.155m in 2011 compared to one of £1.695m in 2010, caused largely by £800,000 of extra bank interest and a chunky £2.7m in interest paid to HIG Capital whose investment in the company is in the form of loan notes.
It can be argued that, without HIG’s £32.5m investment Engine’s growth plans would have well and truly stalled but, as ever, there’s a price.
As well as these extra costs 2011 also saw some damaging client losses at agency WCRS (which promptly changed its management by bringing in Matt Edwards as CEO). The News of the World was abruptly terminated by Rupert Murdoch in the wake of the phone hacking scandal and the Government’s Central Office of Information, at one time the UK’s biggest advertiser, was nixed by the coalition government.
Advertising now ranks only third among Engine’s activities on 21 per cent (PR leads the way on 25 per cent) although Scott still thinks the priority buy is a classy US traditional agency. His problem is that £20m or so (the biggest chunk of HIG’s £30m) doesn’t buy that much in the US even though he can also offer shares in Engine’s LLP (limited partnership). These are not tradable however (a fact that has put off at least one acquisition target in the UK) and Scott, wisely no doubt, refuses to countenance conventional earn-out deals.
On the upside Engine is trading strongly this year, forecasting 15 per cent organic growth in our friend EBITDA with revenues of about £100m. Its start-up social media business Jam is turning over £8m within two years and making a profit. 83 per cent of revenue in 2011 came from the UK. Scott claims that 55 per cent of its current activities across the board are ‘digital.’
Scott says he wants to build similar-sized businesses to the UK in the US and China, which would take Engine firmly out of the mini-marcoms category and place it in a middle league almost of its own. WPP recently bought digital specialist AKQA for $540m (£344m) for its revenues of £146m ($230m), half as big again as Engine’s £100m but that still makes Engine quite a substantial construct in just seven years (including a financial crisis). Revenue of £300m or so, Scott’s target, would make it much more so although it would still trail Havas, the smallest of the big marcoms boys, by about £1bn in revenue and that’s assuming no growth at Havas.
So would a merger make sense?
“Never say never,” says Scott although he says he can’t think of anyone who would be a candidate. He probably could if he thought hard.