LONDON Germany's GfK Holdings AG is working on a cash offer for rival British market research group Taylor Nelson Sofres after Martin Sorrell's WPP tried to muscle in on their original merger plan with a cash and shares bid.
WPP Group, the world's second-largest advertising company, made a hostile 260 pence per share or 1.08 billion pound ($2.13 billion) bid for TNS earlier on Wednesday, after its previous proposals were rejected.
TNS, the world's third-biggest market research company with clients such as Procter & Gamble, again rejected the offer and advised its shareholders to ignore the bid.
It also said it had "permitted" GfK to advance its discussions with an "identified potential source of equity".
But Sorrell, who has made hundreds of acquisitions in his time at the advertising and marketing group, told Reuters that GfK's approach was now in tatters and described the suggestion of a GfK cash proposal as "flaky".
He said he had decided to make a firm bid after meeting shareholders from TNS and WPP.
"We sounded out shareholders on both sides ... and we made the offer we did bearing in mind those conversations," he said.
TNS shares were up 10 percent at 272.75 pence at 11 a.m. EDT on Wednesday, indicating that the market expects a higher offer. WPP was up 0.3 percent at 465.5 pence after previously hitting a five-year low, while GfK was down 11.9 percent.
Analysts believe market research will be more robust in the face of an economic downturn because companies will still need information about clients and their preferences.
They believe most shareholders would prefer an all-cash offer due to the uncertainty in the stock market and believe WPP will have to return with a higher offer -- between 280 and 300 pence -- if GfK matches its 260 pence.
A spokesman for GfK said it would make a "better" offer than WPP, although this could be in reference to the structure and not just the price. Sorrell refused to be drawn on whether he would consider a different structure or price.
TNS and GfK were previously working on a merger of equals but GfK ended this after receiving a strong indication of interest in the cash proposal.
"The form of consideration being considered is all cash, although the formal right to vary this is reserved," it said.
"Presumably GfK would not offer a premium to the WPP given the suggested 'all-cash' basis," analysts at Kaupthing said in a note to clients before the GfK statement.
"Whether a bidding war (GFK counter and then WPP counter) is generated from this situation is difficult to guess at this stage given macro backdrop."
Ratings agency Fitch said it was putting WPP on negative watch after a competing bidder emerged, but still described WPP's rationale for TNS as compelling.
WPP is offering 173 pence in cash and 0.1889 of a new WPP share which, based on Tuesday's closing WPP price of 464p, values each TNS share at 260.60 pence, a 52 percent premium to before the merger plans were announced.
It expects to deliver cost synergies of at least 52 million pounds per year before tax by 2011.
Morgan Stanley said in a note to clients before the GfK announcement that WPP was buying time with its bid.
"It will likely come back with a higher bid," it said.
Collins Stewart analyst Gareth Thomas said he did not expect WPP materially to trump a 280 pence cash offer from GfK.
"First, we don't believe WPP is likely to materially increase the cash proportion of its offer as it will be unwilling to compromise its current credit rating," he said.
"Secondly, if WPP were to outbid an all cash offer from GfK by increasing the share proportion we believe it would destroy the economic rationale of the deal."
WPP Chief Executive Sorrell wants to combine TNS with WPP's Kantar market research business to create the world's second-largest research, information and consultancy group in a market that has grown at around 5 percent in recent years.
Winning TNS would diversify WPP's revenue stream, leaving it better placed to weather any global economic downturn.
(Reporting by Kate Holton and Philipp Halstrick in Frankfurt; Editing by Erica Billingham, Paul Bolding)