News Analysis: Incepta faces its financial Waterloo

As merger talks with Huntsworth are in advanced stages, Tom Williams analyses Incepta's performance in recent years and asks whether the talks constitute a last throw of the dice for the former darling of the City.

When Richard Nichols took over as Incepta chief executive in 2001, he asked PRWeek to judge him on three things: whether Incepta's businesses were the best in their respective fields, if it had the best staff and whether those staff serviced the best clients.

Four years on and Incepta boasts of working for 68 per cent of FTSE 100 firms, 53 per cent of the Eurotop 300 and 28 per cent of the US Fortune 500. But the company's share price has also collapsed on Nichols' watch, falling 85 per cent from the 400p mark when he joined Incepta to around 61p now.

Post-9/11 climate

Although Incepta was not the only marcoms company to be affected by the post-9/11 economic climate, Incepta has struggled with the debt it amassed during its bullish period of acquisition five or six years ago.

Costly earnout purchases of firms such as US corporate PR shop Sard Verbinnen (for an initial £90m) and tech shop Citigate Cunningham (for £49m), whose integration later cost 40 jobs and a ten per cent cut in senior management salaries, contributed to Incepta's whopping £62.1m debt in 2003.

Although Nichols and Incepta chairman Francis Maude are making inroads, cutting debt to £52.1m in 2004, analysts' patience has been tried.

'Incepta has not been able to shake off the damage done by its excessive acquisitions in the US. The City has fallen out of love with it,' says Jim Surguy, MD of marcoms management consultant Results Business Consulting.

Incepta's admission of 'advanced discussions' over an all-share merger with Huntsworth last week will hardly have quashed concerns about debt for investors still smarting from the firm's 2003 £25.7m rights issue.

But the group's failed overtures to Chime Communications at the end of 2004, coupled with the Huntsworth talks, indicate a company that is desperate to do the deal.

The Citigate group of firms, which includes financial and corporate PR powerhouses Citigate Dewe Rogerson (CDR) and Citigate Sard Verbinnen, and consumer PR shop The Red Consultancy, have remained the drivers of Incepta's business. But others - some of which were inherited from Citigate and Dewe Rogerson's merger and subsequent reversal into Incepta - have fared less well.

In his foreword to Incepta's annual review last year, Nichols was candid in admitting that 'to suggest every one of our firms has thrived in the last year would be misleading'. The review went on to detail how Incepta's marketing services division, which includes Red, had posted reduced operating margins because of 'the weak first-half performance from Citigate Broad Street in the US'.

As the market picks up, so perhaps will the revenues of Incepta's more errant parts, but the impact of underperforming businesses on the group as a whole has not gone unnoticed in the City, which clearly hopes an expanded Incepta/ Huntsworth group will cushion such blows or offer the opportunity to dispose of the weakest units altogether.

'Incepta has international reach but lacks the scale to put up with small shocks,' says Collins Stewart analyst Simon Stilwell. 'If Broad Street has a bad year and loses a few million that is bound to affect a business of Incepta's size. A business worth around £200m would find these things much easier to absorb.'

Some former Incepta employees are less charitable about the Huntsworth talks, describing them as Nichols' and Maude's 'last throw of the dice', with Incepta having failed to pull in the calibre of business that would justify its international network infrastructure.

'Unlike WPP, which has lots of separate brands that are clearly part of the WPP family, Incepta does not have enough cohesion,' says one. 'If you want to pretend you are one unit, you have to have a presence with the big corporates. Incepta has only really paid lip service to this.'

Nevertheless, businesses such as CDR and Red are still very much forces to be reckoned with. Last year the Citigate financial and corporate comms brand which includes CDR worked on more than £100bn worth of transactions.

Red continues to attract respect from its consumer PR peers and pulled in the sixth largest fee income for 2003, according to last year's PRWeek table of the top 150 consultancies.

CDR has had to fight hard in the financial PR arena, having only managed to move from sixth position in Mergermarket's 2001 table of top UK financial PR advisers by deal value to fifth position for 2004. Pressure on CDR comes particularly from Brunswick and WPP-owned Finsbury. The departure of high-profile figures (such as Andrew Cornelius, Duncan Murray and Julian Walker to found Gainsborough Communications last year) has also seen it lose business (see p12).

Red will continue to soldier on, but following last September's departure of CEO David Fuller and chairman Lesley Brend about a year after the end of their earnout arrangements with Incepta, the future there also looks less certain.

Last October's nine per cent profit rise - Incepta's first in two years - suggests that it may well be turning a corner. But as Surguy puts it, the firm needs to 'revitalise' its business. When Incepta and Huntsworth's talks finally bear fruit, Nichols and Maude will be praying that the subsequent merger might just pull that off.

WHAT THE INCEPTA/HUNTSWORTH GROUP WILL LOOK LIKE

Sources say Huntsworth CEO Lord Chadlington is more likely to be at the helm of the new group than ex-Conservative shadow chancellor and Incepta chairman Francis Maude (pictured), leaving Incepta CEO Richard Nichols a strong candidate to take over as CEO of the enlarged group.

The new firm is likely to sell or close those parts of the group that are either unprofitable or overlap.

It will combine a collection of Huntsworth PR brands with Incepta's well-established Citigate and The Red Consultancy brands into one group.

On the lobbying front, Incepta has Citigate Public Affairs while Huntsworth has Grayling, which operates the longstanding lobbying shop Westminster Strategy. Huntsworth-owned Trimedia also has a small PA practice as well as providing corporate and public sector consumer work.

Huntsworth's main financial brand is GCG Hudson Sandler, though the group's regional network firm Harrison Cowley handles corporate as well as consumer PR. Citigate Dewe Rogerson is the backbone of Incepta's European financial PR offering and Citigate Sard Verbinnen is a recognised PR power in the US.

The Red Consultancy is Incepta's most powerful consumer PR name. Huntsworth's other consumer offering is EHPR, although the group also includes healthcare specialist Avenue HKM and all-rounders Counsel and Haslimann Taylor.

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