S&P base-case operating scenario
We have slightly revised downward our previous low-to-mid-single-digits organic growth forecasts for 2012, which we now expect to be in the lower part of the range. The revision follows the group's publication of 2.5% organic growth in the first nine months of 2012, with 2% organic growth reported in the third quarter of 2012.
Our 2012 forecasts are broadly aligned with those of Publicis',. although we believe that posting meaningful organic growth in the fourth quarter of 2012 could prove more challenging in light of a weakening economic outlook for Europe, which may translate into reduced corporate profits and a wait-and-see attitude from advertisers in the region. This is despite Publicis' continuing sound growth in emerging markets and digital services; the latter grew about 7.5% in the first nine months of 2012. Furthermore, we believe that advertising agencies such as Publicis may struggle to post significant organic growth in 2013, given the lack of notable events such as the Olympics and U.S. elections, and absent a marked improvement in the global economy.
ZenithOptimedia has slightly reduced its forecasts for worldwide advertising spending growth to 3.8% according to its latest study published in Sept. 2012 (it forecast 4.8% in its March 2012 publication). However, it anticipates 4.6% growth in worldwide advertising spending in 2013, including a return to slow growth in the European Economic and Monetary Union (EMU or eurozone) after a projected decline in 2012. While ZenithOptimedia's forecasts are encouraging for ad agencies' revenue growth in 2013, such a growth forecast could contrast with our macroeconomic anticipations for the eurozone. For example, Standard & Poor's currently anticipates that GDP growth in the eurozone will contract by -0.8% in 2012 and will be flat in 2013. We previously anticipated a modest 1% growth in 2013 for the region (see "The Eurozone's New Recession--Confirmed," published on Sept. 25, 2012, on RatingsDirect on the Global Credit Portal).
Under our revenue growth assumptions for 2012, we believe that Publicis could post a broadly stable EBITDA margin at year-end 2012, depending on its ability to post revenues in excess of staff costs during the remainder of the year. Publicis reported an EBITDA margin of about 15.2% in the first half of 2012, unchanged from the first half of 2011. Its full-year EBITDA margin stood at 17.8% for 2011. We see margin stability in 2013 more at risk under our weaker revenue assumption for next year, which is more conservative than Publicis' indication of a slight margin progression in 2013.
S&P base-case cash flow and capital-structure scenario
Publicis' Standard & Poor's-adjusted average debt-to-EBITDA ratio slightly weakened to 2x at June 30, 2012, compared with 1.8x on Dec. 31, 2011, following the group's buy-back of most of the stake held by shareholder Dentsu for about EUR644 million in February 2012. Dentsu exercised its right to exit Publicis' share capital after nine years of co-operation with the group.
We view Publicis' credit metrics as strong for the ratings at end June 2012, and anticipate these to remain so at year end 2012, thanks to solid discretionary cash flow generation in the second half and the early conversion--at the group's initiative--of its EUR644 million convertible bond into new shares in July 2012. We expect, however, average debt to EBITDA to rise somewhat in 2013, as a result of the acquisition of LBi, a Europe-based digital services agency, for slightly over EUR416 million, and of our assumptions of weaker GDP growth in Europe's largest countries next year. We understand that the LBi transaction should close early in 2013.
We nonetheless anticipate that, under our base-case scenario, Publicis will be able to maintain an adjusted average debt-to-EBITDA ratio of substantially under 2.5x at year-end 2013, in line with the current ratings.
The group's cash flow generation and cash conversion remain a support to its financial risk profile. Publicis reported ratios of adjusted free cash flow to average debt of about 35.5% in 2011, and adjusted discretionary cash flow to average debt of about 28% at the same date, reflecting a reported cash conversion of EBITDA into free operating cash flow of nearly 75%.
Our short-term rating on Publicis is 'A-2'. We assess its liquidity as "strong" under our criteria.
Our liquidity assessment is based on the following factors and assumptions:
-- We expect the group's liquidity sources (including available cash, funds from operations, and credit facility availability) over the next 12 to 24 months to exceed its uses by about 2x. Debt maturities over the next two years are modest, in our view, with about EUR278 million due over the next 12 months to Sept. 30 2013, excluding about EUR240 million of earn-out obligations and minority buy-out commitments that the group reports as financial debt.
-- Even if EBITDA declines by 30%, we believe cash sources would still exceed uses. In calculating cash sources and uses over the next 12 months, we think working capital would peak at about EUR400 million, a level similar to the negative working capital changes reported at the end of June 2012. We typically deduct such peak requirements from reported cash balances, which reached about EUR677 million as of Sept. 30, 2012.
-- Publicis' debt indentures are not subject to any financial covenants.
-- We view Publicis as enjoying a solid standing in credit markets, with generally very prudent financial risk management, as evidenced in the way the group managed General Motors Co.'s (BB+/Stable/--) bankruptcy in 2009.
-- The group has a fully available EUR1.2 billion revolving credit facility maturing in 2016, and EUR450 million in bilateral committed credit lines maturing in 2014.
-- We believe that the group's liquidity is supported by strong cash conversion. Free and discretionary cash flows represented about 75% and 60%, respectively, of EBITDA in 2011. We estimate that Publicis generated free and discretionary cash flows of about EUR800 million and EUR630 million, respectively, in the year ended June 30, 2012.
The stable outlook reflects our base-case estimates under which Publicis will likely post ratios of adjusted average debt to EBITDA of under 2.5x and adjusted free cash flow to average debt of about 20% in 2012 and 2013, in line with our thresholds for the current ratings. Our base case factors in potential softer economic and advertising conditions in 2013, as well as mid-sized acquisitions.
In addition, while we expect the group to continue pursuing an active mergers and acquisition (M&A) policy, we assume that such a policy would not result in significant integration risks and that it would remain within the boundaries of our assessment of a moderate financial policy for Publicis. We also factor in continuing moderate dividend distributions, albeit slightly increasing, and the support of solid free cash flow generation.
We could consider lowering the ratings if we perceived any marked and sustained deterioration in the group's operating performance and free cash flow generation or a substantial change in financial policy, which would result in credit metrics below our expectations over a prolonged period. This could occur, for instance, through materially and durably higher shareholder returns or sizable debt-financed acquisitions.
Conversely, rating upside could materialize if the group were to consistently post adjusted ratios of average debt to EBITDA of comfortably under 2x and free cash flow to average debt of more than 25%. We would also, as part of any potential upgrade, expect Publicis' profitability to remain sound and close to current levels, and its financial policy to be supportive of higher ratings in terms of acquisitions and a return to shareholder activity.
Related Criteria And Research
All articles listed below are available on RatingsDirect on the Global Credit Portal, unless otherwise stated.
-- Methodology: Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012
-- Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
-- Principles Of Credit Ratings, Feb. 16, 2011