Pivotal Downgrades Agency Holding Companies

Cites, in part, concerns about rebates
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Financial research firm Pivotal Research Group has downgraded large ad agency holding companies over concerns about agency rebates and other issues, suggesting investors "move to the sidelines" or exit the sector for the time being.

According to Pivotal senior research analyst Brian Wieser, IPG has been downgraded from "buy" to "hold," and Omnicom, Publicis and WPP from "hold" to "sell."

In a note to investors Monday (April 13), he said that the reassessment was partly because of stock prices recently "pushing the boundaries" of prior ratings, and partly because of a "drumbeat of negativity" from marketers suggesting the large holding companies had been transferring value through rebates, consulting arrangements such that marketer clients did not fully understand specific arrangements with media owners.

He suggested WPP was the least exposed to problems that may follow in this area as its management has been most vocal in defending the notion that agencies deserve to get paid, and that they have the right to be “transparent about being non-transparent.” WPP also discloses gross revenue vs. revenues net of media trading, he said.

Of the others, he said: "None break out revenue from barter, cash rebates, consulting or media agency 'research' fees, the book of business from media inventory banks nor trading with equity investees. Consequently it is difficult for the companies’ clients – or investors – to identify the degree to which different agencies’ historical growth rates have been supported by the aforementioned activities which may impact benchmarks for future growth."

He said it was unclear how much a "haircut" to growth the holding companies might take because it his hard to determine the scale of the at-risk revenues or cash flows.

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