Does Sir Martin Sorrell have his eye on sports marketing glory? Unravelling the WPP/Chime deal

12th August 2015

Far be it for me to question how Sir Martin Sorrell and WPP go about their business, but my first thoughts whilst on holiday when I heard that WPP was to buy out Chime Communications was: “Why?”

After all, on the surface at least, it looks like a very unusual move. Firstly, £374m is approximately a 33 per cent premium on the share price. Secondly, WPP went into a joint deal with US private equity firm Providence (so it’s not even acquiring Chime outright).

However, on reflection, last week’s deal makes a lot more sense when you look at Chime’s business in more detail and when you start thinking about Sir Martin & Co’s motives.First of all, let’s look at Chime itself.

It started as a private company in 1989 following a management buyout from Lowe Howard Spink & Bell to form Lowe Bell Communications, subsequently floating in 1994 as Chime Communications plc.

Chime now comprises five divisions, some 55 companies and over 1,700 people – one of whom was Lord (Tim) Bell, a Thatcher favourite and one of the advertising and PR industry’s most well-known, colourful – and controversial – characters. He left the company in 2012, having led the MBO of Bell Pottinger, but will remain forever linked with it.

Among Chime’s companies are highly-regarded ad agency VCCP (of “Compare the Meerkat” fame); PR group Good Relations; Open Health, a collection of specialist pharma and health marketing agencies; and the CIE group of opinion insight agencies.

But most of all, Chime is very strong in one of the fastest-growing areas of advertising and communications: sports marketing. Its agencies in this sector include some of the most successful in the business: Essentially, Blaze, Fast Track and ICON. And in the past few years it has increasingly focussed on sports marketing, which is more profitable than PR. Chime’s sports marketing division, which last year generated 43 per cent of the group’s £300m of revenues, is chaired by Lord (Seb) Coe, one of the most influential figures in world sport.

Sports marketing is one of the few areas in marcomms that hasn’t suffered digital disruption and opportunities abound – sports such as football, golf and motor racing are awash with money. Some observers feel that WPP has lagged behind the curve, so the City will be pleased to see the acquisition of a strategic asset in this space.

WPP has become – for obvious reasons – more interested in sport over the past year or so. In January, the group invested in Bruin Sports Capital, which aims to spend $250m buying sports rights and in May, WPP set up a sports agency called ESP to represent the likes of the Cleveland Cavaliers basketball team, Manchester City FC, and the England & Wales Cricket Board.

So, straightaway, Chime is a good fit that chimes (sorry) well with WPP’s sporting interests. And Chime and WPP already have a relationship stretching back over a decade – WPP has held around 20% of Chime’s shares for a long time.

Indeed, as Sir Martin is a buyer and never a seller, this limits Chime’s appeal as a takeover target without WPP’s agreement to sell its stake. Notwithstanding WPP only held 20 per cent of the equity, it was potentially always in a position to block a takeover by another group. If other significant Chime shareholders wanted to realise value, placing sizable chunks on the market is also a risky strategy.

So, on the basis that Chime has made no secret of wanting to position itself as a sports marketing specialist, and other significant Chime shareholders may have wanted to realise value, the only real way of doing this was to find a private equity partner to buy their shares and this is what has happened.

WPP and Providence have formed a new company to take over the Chime business with WPP maintaining its 20 per cent stake in Chime, which may increase depending on whether or not Providence reduces its equity in exchange for bank debt.

But why go in with Providence in particular? Again, things make more sense when you probe its other investments. Providence, with some $40bn in assets under management, already has a portfolio of sports-related investments, including Learfield Sports, a US college sports rights and marketing agency; Yankees Entertainment & Sports Network, a TV network associated with the famous New York Yankees baseball team; and Ironman, the hugely successful internationally-franchised triathlon competition. So there could be some synergies here.

Ultimately, as other acute observers have already said, what’s in this for WPP is the opportunity to build Chime – and thus its own presence in sports marketing – out of the publicly listed market glare before deciding whether to realise its investment or buy out Providence should Chime prove to be a more suitable investment for WPP in the future.

In a way, WPP can’t lose. The money it paid is unlikely to keep Sir Martin and his finance team awake at night. But they have the ability to remain a significant part and observe how the sports marketing space develops. As Chime is no longer listed, its management can make long-term or strategic decisions without having to worry about jittery or demanding stockholders.

It’s this latter point that is also of interest. Given Chime has a stated aim to focus on sports marketing, one has to ask how this bodes for its other investments that are not sports and entertainment linked. Whilst it is largely expected VCCP at 45 per cent of Chime’s 2014 revenue (equal to the sports interests) is expected to remain in the fold for the medium term, I wonder what the strategy will be for its healthcare marketing arm, Open Health, and Chime’s insight group – which combined only constitute 10 per cent of revenues and must surely now be non-core.

Many of the marketing conglomerates are currently bolstering their healthcare marketing expertise, most notably Havas which last month acquired leading London healthcare agency Just:: Health Communications (a Green Square transaction, I’m proud to say).

It will therefore be interesting to see what transpires in respect of Chime’s healthcare and insight interests.