Analysis: FD bosses try repeat of MBO coup

Troubled Cordiant Communications' City PR firm Financial Dynamics has gone through a tumultuous recent history. With yet another multi-million pound change of hands imminent, the era of permanent change continues.

For City PR firm Financial Dynamics, being disposed of will be the best thing that could happen. Its parent, Cordiant Communications, has endured a bloody run, losing £389m last year, which makes a sale of its three-year-old purchase something of a necessity.

And there is widespread agreement in the City that the extension to its banking facility Cordiant management agreed last week - after a reported scare triggered by the loss of long-term ad client Allied Domecq - makes the rumoured MBO more likely than ever.

For employees at FD, there has been little recent appeal to being tied to Cordiant share options that are barely worth the paper they are written on. There are suggestions in the City that FD will offer Cordiant somewhere between £25m and £30m. While this is not exactly small change, it represents a multiple of just five or six on pre-tax profits, estimated at £5m. 'They may even get it cheaper,' says one source. 'It could go in a fire sale.'

No rival buyers are on the horizon to strengthen Cordiant's hand, and 70 per cent of the advertising group's recent goodwill impairment write-down of £224m related to Lighthouse Holdings, FD's former owner. Therefore, the MBO team is in a good position - but Cordiant chairman Nigel Stapleton will be keen to ensure that the bargain basement is kept firmly locked.

'They may buy it,' one agency head says of FD's management. 'But they will have a job selling again afterwards. People will be wary.'

If that is the case, it would certainly buck a trend: buyers have rushed to purchase FD over the past decade or so - first Broad Street Associates in 1987, then GGT and Lighthouse during the 1990s, and, finally, Cordiant in 2000. Nor will this be the agency's first MBO. In 1998, its directors bought the company from then-owner GGT for £8m.

When it comes to buying and selling, FD has a pedigree Premiership football managers would envy - and ten out of 15 of the last MBO team are still with the agency.

The new MBO will inevitably carry with it past tales of the millions apparently earned by FD directors five years ago. 'In the medium term, this offers them a real incentive to grow the business and is a big motivator to do well,' agrees one rival. 'But in the short term, offering equity to the team can be disruptive. I would be looking for any signs of internal morale problems.'

Perhaps more fundamentally, the question of money may be far from cut and dried. 'FD has a lot of excellent people in London, Dublin and New York, who will presumably want a slice of the action. The question is, how much pie is available?' says another rival.

'They will be using a venture capitalist's money and that provider will take his or her pound of flesh, leaving not a huge amount. In MBOs, the VC says: "How much cost can we cut out?". In a PR firm, the massive cost is salaries, which means wage cuts or job losses. And if you haven't got a carrot, what have you got? I would be amazed if people hung around if it didn't suit them.'

The quality of FD's people is not at issue, although last year, two of the previous MBO's big winners, Nick Miles and Hugh Morrison, broke away after a legal spat with the board to launch the smaller PR shop M Communications.

'FD suffered a bit from that loss,' says another rival.

Competitors say it is a situation not improved in the past two years by the loss of high-profile FD clients. The company has lost both Reuters and Carnival to rival Brunswick, and The Maitland Consultancy picked up three FTSE 100 clients - Tesco, Kingfisher and Cadbury Schweppes - from FD in the last couple of years.

But Financial Dynamics CEO Charles Watson, who is leading the current MBO talks, insists the company has replaced them with business of comparable standing. 'We are highly profitable, making a very respectable margin on our retained client base of 350, revenue from which grew nine per cent last year,' he says.

'In this stage of the market, a lot of companies are going through change, and new management tends to bring in new advisers.'

This flux has also benefited FD, he continues, with wins such as Interbrew, British Energy, Network Rail and Thistle Hotels. 'And over the past year, we have generated vast revenue through business in the US,' he adds.

FD has certainly proved itself adaptable: witness its recent opening in Greece, a region often regarded as something of a PR backwater, but which is within the eurozone. 'It is easy to underestimate that, as a franchise, it has survived and grown in a difficult market,' says one onlooker with grudging admiration. Another agrees: 'it's got a good client base and has a record of reinventing itself.'

The agency will need to do itagain if the MBO goes ahead, according to one City agency head: 'FD is a big business, but I don't get a sense that it is one of those companies with momentum at present.'

FD also suffers from the lack of a figurehead in the style of, say, Alan Parker at Brunswick, argues another agency boss. 'FD is an excellent machine.

It has good people in their late 20s who could hold their own in any company in the market. It will make money (after an MBO), but not very much. Clients want senior, big-hitting people on their account. Will FD have the passion?'

With Cordiant last week granted a two-month stay of execution by its creditor banks, this question will shortly be answered.

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