May 10 (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
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
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
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
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