Disappointing S4 figures suggest the only way left for Sorrell to go is up. Tony Walford writes in The Drum

28th March 2024

S4 Capital has reported a 25% drop in core earnings after what the group described as a “difficult” 2023. Will things get any easier in 2024? Green Square’s Tony Walford examines its prospects and explores whether a mooted mega-merger could offer salvation.

Sir Martin Sorrell is an incredibly resilient character, indeed potentially the most resilient of our industry over the last 50 years. His career includes being ‘the third Saatchi’ in the ’70s, where he completed multiple acquisitions, through to creating WPP in the ’80s (and building it to be the largest marketing group in the world), to creating his current digital group, S4.

His career has seen him deal with many issues, from personal slants following hostile takeovers, criticism from institutional shareholders over his employment contract, shareholder revolts over his remuneration, and the famous Shepherd’s Market personal misconduct accusation. The latter led to him being ousted from WPP and creating S4, the vehicle he used to buy the highly regarded creative production outfit Media.Monks and subsequently making MightyHive S4’s first digital media buy.

S4 has since completed over 30 acquisitions on a funding model that includes a mix of cash and S4 shares and no earnouts – the idea is the earnout is effectively replaced by the future increase in value of the shares received by those selling in.

However, S4’s share price has declined from 878p in September 2021 to today’s 40p, following myriad issues that started with delayed audit reports on fears of poor financial controls and accounting practices, through to repeated profit warnings and worries over Sorrell’s own health.

Today’s results announcement was really nothing new – more tales of woe, clients spending less due to recessionary fears, challenging macroeconomic issues, revenues for 2024 anticipated to be down again, but operational profits expected to hold constant. There was no joy in there aside from its debt at £180m being at the bottom end of expectations – a little ray of light in a high-interest rate environment – and a possible first dividend if the second half of 2024 looks good.

So, where does this leave S4? There have been rumors of a bid by Stagwell at a premium to S4’s current £240m market value. Sorrell has dismissed this by saying he has not received a credible approach, but surely others must be circling.

Despite the current share price languishing around the 40p mark, S4 has some great talent from smart acquisitions. It has a solid blue-chip client base, 10 of which are each delivering over $20m in revenue (albeit a very significant chunk of S4’s revenue comes from the tech sector, which is facing its own challenges) and it has taken action on cost reduction. Thus, it remains an attractive proposition for many competitors that could do with this expertise and client base, which is why I expect to see more approaches over the coming months.

It’s hard to see where S4 can go from here on its own. As mentioned earlier, its model has been built on acquisition, buying agencies with a fairly big chunk (up to 50%) in S4 shares. When your share price is 800p+, you don’t have to issue that many to get to a decent value. When it’s 40p, you have to issue 20 times that number to get to the same price.

So, S4’s hands are tied unless it’s prepared to significantly dilute – not a very attractive thought. And what will those who took shares at 800p be thinking? Not only has the share consideration element they received dropped by 95%, but they must question if it is ever going to recover. And given S4’s repeated profit warnings, who would want to become part of that group at this moment in time?

But you could argue for the share price, the only way is up. I’ve said it before – underestimate Sorrell at your peril. He is the King of Resilience and I hope that the next piece Green Square writes on S4 is a more positive one… not least because I am also a shareholder.

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