RPT-Fitch affirms WPP at 'BBB+'; outlook stable
May 10 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has affirmed WPP plc's (WPP) Long-term Issuer Default Rating (IDR) at 'BBB+' with a Stable Outlook. Fitch has also affirmed the senior unsecured ratings of the bonds issued by WPP Finance S.A., WPP Finance UK, WPP 2008 Ltd and WPP Finance 2010 at 'BBB+.'
WPP's ratings are supported by its leading industry position, strong portfolio of media and advertising, measurement, market research and brand management businesses, sound financial metrics and well communicated corporate strategy. The largest of the global advertising holding companies (GHCs), the company exhibits strong company specific traits in the context of Fitch's sector risk profile approach to GHCs. Financial policies that balance the need to continuously invest in M&A along with an emphasis on increasing shareholder remuneration are likely, in Fitch's view, to keep leverage (average net debt to EBITDA) towards the high end of a stated target range of 1.5x - 2.0x. This combination is likely to constrain the ratings beyond their current level.
KEY RATING DRIVERS
Scale, Breadth and Diversity
As the industry's largest global advertising holding company (GHC) by revenues, WPP's ratings are supported by its scale, breadth of business and geographical diversity. The company has a balanced mix of creative (advertising and media investment) and non-creative (brand management, consultancy, market research and measurement) businesses.
Growth of Digital
The company has built a strong position in digital media through both acquisition and organic investment - an important strategy for any GHC in light of the importance of, and growth expectations for online advertising. Currently accounting for 33% (at YE12, pro forma for the AKQA acquisition) of overall sales, the company has a medium term target for "new media" revenues to reach 35%-40%.
Equally significant is an established presence and focus on emerging markets, in light of the maturity of western European (36% of 2012 sales) and North American (34%) markets. The company raised its target for revenue in its faster-growing markets in 2011, from 30% of group sales to 35%-40%.
The AKQA acquisition (announced June 2012, closed H212, cash proceeds of GBP348m) is estimated to have added around 1.5% of incremental advertising and media investment revenues in 2012 and is a business that is growing much faster than the wider advertising market. The deal pushed WPP's acquisition spend above a guidance budget of GBP400m, and added 0.1x to the 2012 average net leverage metric.
Fitch expects ongoing acquisition activity along with earn-out payments to be in in the region of GBP500m to GBP550m, with most deals relatively small to medium in size and bolt-on in nature.
Financial discipline has been good since the TNS acquisition in 2008 for GBP1.6bn, which along with the downturn in the global economy resulted in leverage spiking and the ratings being downgraded to 'BBB'.
Average net debt to EBITDA was 1.9x in 2012 (including Fitch's adjustments for associate income), and marginally up on 2011. The metric is being managed within a target range of 1.5x - 2.0x and Fitch expects it to moderately improve in 2013. Management has identified M&A, dividends and buybacks as its priority uses of free cash flow. However, Fitch believes management understands the need to preserve balance sheet metrics, with large and more balance sheet transforming acquisitions less likely given the current level of industry consolidation.
Positive: Future developments that could lead to positive rating actions include:
The company's financial policies and M&A strategy are likely to keep ratings at the current level.
Negative: Future developments that could lead to negative rating action include: Events leading to average net debt/EBITDA trending consistently above 2.0x would pressure ratings. Trends that were driven by a weakened operating profile or a change in financial policy would be particularly concerning - more so than M&A or cyclically driven trends which might be expected to reverse relatively quickly.
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