Publicis to buy digital ad firm Sapient as part of growth strategy

The French group is hoping rapid growth in both North American and internet advertising, which are far outpacing European and traditional ad formats, will help it catch up with sales gains at rivals such as WPP and Interpublic.

Chief executive Maurice Levy has blamed Publicis’ recent poor performance on a failed merger with ad agency Omnicom, which was announced in August 2013 and abandoned in May.

But some analysts said Publicis’ offer of $25 per share, a 44 per cent premium to Sapient’s closing price on Friday, was a hefty price for a company whose growth may have peaked. The transaction, which followed an unusual rally in Sapient shares and options last week, could also dash hopes among the French company’s shareholders that cash might be distributed to them, analysts said.

“A good asset at a steep price,” said Exane BNP Paribas analyst Charles Bedouelle of the deal, adding it would “likely push back (Publicis’) cash return story by two years.”

UBS analyst Tamsin Garrity said Publicis had been under pressure from investors to return cash, and was expected to announce share buybacks at a strategy day on Friday.

“The acquisition of Sapient makes such returns unlikely,” she added. Ms Garrity has a neutral rating on Publicis shares.

Mr Levy defended the decision, saying the company would generate more value in the long term by buying Sapient rather than buying back its own shares. He pledged to update investors on his approach to dividends and buybacks sometime in November.

“This operation is extremely important for securing the future of Publicis,” Mr Levy said. “It is far better to invest and deliver a higher growth and higher profits ... which will lead to a re-rating, rather than simply buy back our own shares. The deal will create a foundation for accelerated growth” by giving Publicis access to new markets and revenues,” he added.

Publicis said the deal would be financed through existing cash and new debt, and would not affect Publicis’ credit rating. It did not say when it would add to group profits but forecast 50 million euros in annual cost savings.

Sapient’s sales grew 14.1 per cent to 1.1bn euros last year, far outstripping Publicis’ sales growth of 1.2 per cent, although the French company had a higher operating profit margin.

The US-based group earned 63 per cent of its 2013 sales in North America and has 13,000 employees, 8,500 of which are in India.

“The risk that growth slows at Sapient is one of the transaction’s more important considerations,” said Pivotal Research Group analyst Brian Wieser.