WPP Remains Undervalued

Advertising holding company WPP WPP announced that it will sell part of its data and research business, Kantar, to Bain Capital Private Equity for a total enterprise value of GBP 3.2 billion. While this is below the GBP 4 billion valuation we had estimated for Kantar, our fair value estimate for WPP is not affected. Although WPP’s share price has increased more than 11% year to date, we continue to view this narrow-moat name as attractive, and it remains one of our best ideas.

WPP and Bain have agreed that WPP will retain a 40% stake in Kantar and will continue to have access to Kantar data to design and launch higher-return-on-investment ad campaigns for clients. The transaction allows WPP to not only deleverage but also have a bit more flexibility to focus on further integration of technology and creativity, which we think remains the main differentiator in the advertising space. With a healthier balance sheet, WPP shareholders will benefit from the further assurance of no dividend cuts during the company’s current restructuring and turnaround phase. WPP also plans to use some of the cash received to reward shareholders via share buybacks and/or a special dividend. The transaction is likely to close in early 2020.

This deal basically creates a joint venture of which Bain Capital will control 60% and WPP the rest. The transaction implies a total equity value of GBP 3 billion for Kantar. The two parties also agreed that WPP will invest GBP 320 million for its 40% ownership of Kantar. After taking into account that investment as well as tax and transaction costs, WPP will receive GBP 2.5 billion in cash from Bain. The ad holding company is planning to use approximately 60% of that cash, or GBP 1.5 billion, to reduce debt on its balance sheet. The company is confident that it can hit the low end of its targeted 1.5-1.75 net debt/adjusted EBITDA range by the end of next year, one year earlier than it had expected. The remaining GBP 1 billion will be awarded to shareholders over time.

Kantar’s GBP 3.2 billion enterprise value represents a 2018 enterprise value/adjusted EBITDA of 8.2. After adjusting our model to exclude Kantar beginning in the second quarter of 2020, our fair value estimate for WPP represents 9.5 times the company’s 2021 adjusted EBITDA, which we view as fair, given that the company is expected to have completed its three-year restructuring in 2021. In addition, we slightly increased our margin expansion assumption for WPP after 2021, as we think that over the long term, there will be fewer investments required by the company to manage Kantar data. Kantar revenue has historically generated slightly lower margins. In terms of sales, Kantar’s valuation represents 1.2 times 2018 revenue. Our valuation of WPP is 1.4 times the company’s 2021 total revenue. Kantar accounted for 16% of WPP’s revenue in 2018.

Besides deleveraging, we think another benefit for WPP associated with this deal is additional flexibility to focus on the use of data to speed the production of digital and creative campaigns, which most ad agency clients are demanding. Further, WPP and its shareholders could benefit from any improvement that Bain Capital’s investments in Kantar’s operations may bring.

We think this agreement’s impact on WPP’s ownership and access to data will be minimal. First, WPP will continue to have access to Kantar data as it did before. Costs associated with attaining the data will not change. Second, after the completion of this transaction, the company will still have ownership of data generated and gathered by its GroupM and Wunderman Thompson businesses. Third, WPP will continue to use data provided by many other parties, including Google and Facebook, similar to what it has done in the past. Fourth, the company will continue to tap into its clients’ data (or first-party data). We also note that WPP does provide third-party data management services to its clients. According to management, the company is in the process of migrating all of that to the cloud.