Growth at the world’s largest advertising group WPP almost ground to a halt in September, forcing WPP’s Sir Martin Sorrell to cut the company’s 2012 revenue growth estimate to between 2.5 per cent and three per cent. As recently as August he was forecasting 3.5 per cent, itself a reduction from four per cent earlier in the year.
So what happened in September? WPP grew by just 1.9 per cent and Sorrell says: “Goodness knows frankly what happened in September. July and August were OK, they weren’t brilliant but they were in the three range, but I think we’re exceedingly cautious now. There’s a lot of concern out there.”
Sorrell is obviously preparing the market for the worst, blaming the slowdown on the eurozone (fair enough, even the German economy is grinding to a halt although the UK’s is inching forwards, temporarily anyway) and fears about the fiscal deficit in the US. While it’s true that there needs to be a political deal on this in the US, whoever wins the election, the US is still growing. Advertising budgets, however, are not.
Perhaps the most alarming thing for investors is that WPP’s net debt rose to £3.1bn, up £329m. This may be due to the purchase of digital agency AKQA for £336m in June, suggesting that the money was borrowed. WPP’s full numbers are here. If growth is drying up WPP’s debt may become a problem.
By sector advertising and media buying were WPP’s strongest performers, as they have been consistently through the recession. WPP investors won’t need reminding that all the other bits of the humungous company like research (consumer insight as WPP likes to call it), PR and branding do not deliver the same returns as advertising, which is where the company started, on the worldwide stage anyway.
A different CEO to Sir Martin might wonder if a few disposals of what some might call ‘non-core’ activities might be useful in bringing down that debt. Such a plan wouldn’t hurt the share price either.