Advisers: UBS (Cordiant); Goldman Sachs (WPP)
Deal size: £276 million
Date announced: August 1 2003
Buying debt to acquire a business might be slightly more common in Europe these days, but advertising agency WPP’s use of such a strategy to acquire rival Cordiant Communications was an unusually tough deal.
The story begins at the end of April. Cordiant had been working with its creditors to restructure its debt, and was close to a deal. It had worked out a programme of disposals to reduce debt and agreed to raise new equity to refinance the business. A common steering committee of bank lenders and bondholders included RBS, HSBC, Bank of New York and, from the noteholders, Prudential.
Then, on April 28, drinks company Allied Domecq dropped its advertising agency, Bates, a Cordiant subsidiary. That threw the recent negotiations into doubt. “The creditors and the management believed that, with the disposal programme and rights issue, it could all stack up,” says Allen & Overy finance partner Robin Harvey, one of the senior lenders’ legal advisers. “Until Cordiant lost Allied Domecq. Without that account, the management’s view was that Cordiant couldn’t continue as an independent business.”
The decision hit Cordiant’s debt, which was already being sold down. That opened the door even wider to distressed debt funds, chiefly Cerberus. “When Cerberus started buying debt between February and April, it paid between 70% and 80%,” says a banker who worked on the deal. “After the Allied Domecq announcement that figure dropped as low as 60%. It was an absolutely critical moment.” Eventually Cerberus acquired over half of Cordiant’s notes and part of its senior debt.
By contrast, Cordiant’s equity held on to its value for a while after Allied Domecq’s announcement. The equity market was taking a more positive view of Cordiant’s long-term viability, if it could find the right buyer. Trade buyers, which had been sniffing Cordiant for some time, closed in on its debt with a view to acquiring the company.
The negotiations were tense and urgent. Advertising and marketing companies are built around key staff, and clients are sophisticated corporates that want to know if their supplier is financially viable. While its future was uncertain, Cordiant’s businesses risked losing its star people and yet more key accounts.
Cerberus shows its teeth Cerberus’s tough approach accentuated that threat. “Cerberus was not shy about taking the company to the wire,” says another adviser. “But when you’ve got a business where any hint of litigation or insolvency will destroy customer and employee confidence, that puts you on a knife-edge.”
Cordiant and its financial advisers, UBS, had to push on with Cordiant’s disposals, selling Scholtz & Friends in Germany, Australia’s George Patterson Bates, and Financial Dynamics in the UK. Cordiant also had to deal with Zenith Optimedia, its UK joint venture with French group Publicis.
On June 19, after Publicis had bid, WPP offered to pay £266 million ($425.6 million) for Cordiant’s debt and £10 million for its equity, buying the banks out at par and doing a separate deal with Cerberus. This was the crucial moment, giving WPP a new status as the sole lender to the group.
But it had a plan B if Cordiant’s shareholders – chiefly Active Value, which owned 25% of the equity – didn’t agree to its bid.
As the only lender, WPP could ask Cordiant’s board to put the company into administration. It could then have acquired Cordiant’s business and assets using a pre-packaged arrangement with the administrator.
“When WPP buys the bank debt, it’s got the company, because it has got the pre-pack to fall back on,” says an observer. “That’s unusual.”
Publicis wasn’t wholly out of the picture. Active Value reportedly looked into trying to declare a change of control of Cordiant that could have allowed Publicis to pay far less than £75 million for the rest of Zenith Optimedia. In the event, Publicis declined to do a deal and WPP structured its acquisition so that Cordiant’s shares were delisted on July 16, before a change of control was declared.
“Our first stage in feeling confident was purchasing all the debt,” says WPP’s finance director, Paul Richardson. “The second was the delisting. And the third was when Active Value voted in favour of the scheme of arrangement.” WPP not only got what it wanted, it got it quickly, before that value had dissipated. “We announced the terms of our offer on June 19, and the acquisition was effective on August 1,” says Richardson. “That’s no longer than a normal share-offer process.”
The deal also threw up bigger picture issues, not least how the relatively unregulated secondary debt markets operate when a public company is up for grabs, and the position of debt traders is caught up in the Takeover Code, which governs the target’s behaviour.
Cerberus’s role was both as a potential bidder for Cordiant and one of its biggest creditors. Cerberus the creditor could have found itself in receipt of sensitive information, such as management reports, that were advantageous to Cerberus the potential bidder. Cordiant’s and its creditors’ advisers, UBS, Allen & Overy and Bingham McCutchen, approached the Takeover Panel for guidance. The panel provided some much-needed clarity.
“The tricky issue was how the dissemination of information to Cerberus as a creditor should be treated under the Code, given its other potential role,” says A&O’s Harvey. “The panel was approached and gave a rapid and very clear view, allowing Cordiant and its creditors to proceed with certainty and without delaying the urgent process. This is an issue the panel will have to visit again.”
