WPP Faces Challenges Under Mark Read’s Leadership

Share prices are not always the best indicator of a company’s health, as evidenced by WPP’s recent performance. Under the seven-year stewardship of Mark Read, the company’s stock has plummeted by 50%, leading to a market valuation of just £6 billion. Despite this, could it be possible that Read leaves behind a more robust organization?

At 58, Read has faced significant challenges during his tenure. He stepped into leadership following the controversial departure of Sir Martin Sorrell, who spent 30 years building WPP but left abruptly amid allegations surrounding market misconduct. When Sorrell exited, shares were priced at £11.11, but it soon became clear that his sprawling empire of 3,500 legal entities across 113 countries was more of a personal domain riddled with debt than a unified corporate entity.

It’s questionable whether anyone else could have managed this complex setup adequately. While issues at S4 Capital suggest flaws in Sorrell’s methods, it became evident that WPP’s vast array of acquired companies, which were poorly integrated, posed systemic challenges. Read’s role was to untangle this complicated web.

Fortunately for Read, his experience of over thirty years at WPP placed him in a relatively strong position. When he took over, he managed 150 direct reports—which he has since streamlined to 22—and was responsible for overseeing 500 brands, which he significantly reduced to six, now representing 92% of the company’s sales.

He also integrated various in-house agencies that once competed with one another, resulting in collaborative divisions such as the VML creative unit, now including Young & Rubicam, J Walter Thompson, and Wunderman. Furthermore, Read has made strides in reducing the company’s £5 billion net debt, generating £2.4 billion from the sale of a 60% stake in the research business Kantar to Bain.

Read is correct in stating that clients now have a simpler structure to navigate. However, after what he referred to as an “unrelenting” overhaul that felt akin to “painting the Forth Bridge,” it is clear why he has decided to step down at the end of this year, especially with incoming chairman Philip Jansen, formerly of BT, likely influencing this decision.

WPP has struggled to achieve growth, facing headwinds from various external factors, including the COVID-19 pandemic, the war in Ukraine, and the political turmoil surrounding Donald Trump. Losses of key contracts, including work from Pfizer and Coca-Cola in North America, have dampened market sentiment. Additionally, WPP’s media division, GroupM, has faced difficulties, prompting the return of Brian Lesser as its head. As Read worked to remodel the company, rival Publicis overtook WPP to become the largest advertising business globally. Mergers between Omnicom and Interpublic also present new competitive challenges, while advancements in AI may complicate matters further, despite WPP investing £300 million this year in building in-house capabilities.

While Read denies any conflict with Jansen, whose brother, Chris, leads Kantar, he claims that his decision to leave was personal. Jansen, who managed a declining share price at BT, would not overlook the fact that WPP’s shares are now priced at 543.5p, reflecting a 3% drop following the news of Read’s departure. After all of Read’s extensive efforts, the company is in need of a new chief executive who will be tasked with driving growth. Following last year’s net sales of £11.4 billion, WPP anticipates stagnation for the current year, predicting zero to a 2% decrease in performance.

The eventual outcome appears to be a strategic separation, with Jansen expressing gratitude to Read for “setting WPP up well for longer-term success.” This assessment seems accurate. While Read’s successor may enjoy a potential increase in share value, it will be underpinned by a seven-year journey of reform.

Thames Water’s Future in Limbo

Is a takeover a viable option for Thames Water, or merely a distant dream? Following KKR’s withdrawal from a recent bidding process, senior creditors of Thames Water have presented a plan. However, describing it as a “£17 billion recapitalisation proposal” may be overly ambitious, as its success hinges on securing a favorable agreement from Ofwat, which has historically been resistant to such deals.

To break down the financials, the proposed plan includes £11.7 billion in write-offs along with £3 billion in new equity and £2.25 billion in fresh debt. Notably, a sizeable £5 billion of the written-off amount relates to equity that has been essentially worthless for some time. Furthermore, another £2.5 billion concerns similarly unvaluable debt held by the parent company. The initial financial distress would begin with a complete loss for junior B creditors, alongside a £3.2 billion reduction in the A creditors’ share of £16 billion in total debt.

Nevertheless, if this plan comes to fruition, Thames would end up with an estimated net debt of around £13 billion and gearing at 57%, given that a deal could potentially close by April next year. During that time, the regulatory capital value of the group is expected to increase from £20.2 billion to roughly £23 billion, establishing a framework that could be rated as investment grade.

Yet, the primary complication arises from the creditors’ demand for a “regulatory reset,” meaning they seek immunity from past penalties and fines totaling £1 billion related to sewage management and unmet performance metrics. This request aims to avoid what they term a “doom loop” of ongoing underperformance. This creates a challenging dialogue with Ofwat, which may push for further debt write-offs instead.

Despite these complexities, there appears to be potential for a deal. The creditor group comprises 100 institutions, led by eight key players, including long-term investors such as Royal Bank of Canada, Assured Guaranty, and Pimco, as well as hedge funds like Elliott and Silver Point. Although they may not be the ideal stakeholders, plans to eventually float the business are on the horizon. Currently, the only other alternative under consideration is a potential bid from CK Infrastructure or special administration.

Ofwat is unlikely to want to treat Thames as an isolated case. However, a resolution may be necessary to end the ongoing issues facing the company.

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