M&C Saatchi has reached a “key turning point” where it has now returned to revenue growth after a troubled financial period and will no longer have to dilute existing shareholders to pay earn-outs to agency founders.
That’s according to Moray MacLennan, the global chief executive since January, who told Campaign that clients have developed a “renewed belief in marketing” since the pandemic.
Creativity is still the “front door for the M&C Saatchi brand” in terms of attracting clients, even though it is not the most profitable part of the business, he said in an interview. His comments come in the wake of half-year results that showed net revenues up 14% to £118 million in the six months to June, compared to a 13% decline in the same period a year earlier.
Importantly, M&C Saatchi agreed new lending facilities with its banks and now has enough “liquidity” that it can settle the put options of agency entrepreneurs in cash in future, rather than issuing new shares to pay them—a decision that should mean existing shareholders are no longer diluted and should make the shares more attractive to investors.
M&C Saatchi, which recently announced a three-year deal to be principle patron of the Saatchi Gallery in Chelsea, is keen to rebuild its reputation and simplify operations after an accounting scandal in 2019 that led to boardroom clear-out.
MacLennan was upbeat in the interview about the outlook, despite challenges such as rising inflation and the war for talent among younger staff.
Campaign: You say in your stock market announcement that the results were ahead of expectations. What are the key trends and can you explain about “clients’ renewed belief in marketing”?
MacLennan: A striking feature of the last 18 months has been the levels of investment, with clients reallocating capital expenditure from other areas into marketing—the industry has been banging that drum for many years, decades, through downturns and difficulties—and it’s now come to fruition.
2021 is [on course to be] a record advertising year – about $650 billion, up 10%—and there’s 72% of CMOs in The CMO Survey saying during the pandemic the importance of marketing had increased. What will be interesting to see is if that is a short, medium or long-term phenomenon—my view is that it will last into the medium term. That is really good for our market and sector in the UK and globally and, of course, digital growth is over-indexing.
What we’re also seeing with our clients with new business opportunities and existing [business] is clients seeking an optimised solution requiring capabilities across the full marketing landscape – virtual and real [experiences], innovation, earned, owned, paid [media]. Connected growth, which is our strategy, is a growing need for clients
There are two other trends: The demand for ESG credentials and the war for talent.
We’ve seen 100% of RFIs this year have demanded ESG credentials. ESG is in the top five criteria [for more than 80% of clients surveyed]—OK, it is the fifth criteria but nevertheless up there with creativity and effectiveness.
We’ll be launching an ESG consultancy with world-leading expertise before the end of the year and the interesting thing for our industry is looking at our own carbon footprint and the major effect that we can have is in the work that we do.
The final trend is the war for talent. I was struck by the fact that [a Microsoft survey of 20,000 workers showed] 54% of people under 25 are actively considering leaving their current job and 70% want to work for a company with a strong environmental agenda and a purpose. Again, I think that puts our company and our brand in a good position [because of M&C Saatchi’s focus on ESG].
At the moment, talent costs appear to be under control. Net revenue was up 14.2% and headline operating costs up 6.6%, predominantly due to staff costs. How much do you worry about the salary bill rising further?
It’s basic stuff—revenues need to grow ahead of costs and it’s very difficult to add revenue without adding staff costs in our business. Hence the costs are going up, but not as fast as the revenue.
Going forward, there are wage inflation pressures within the sector and I think we will see it in our business going forward. But the operational efficiencies we’re driving and the other cost-cutting programmes we’ve put in place should ensure we keep not just our costs under control but our margins growing in the future as well.
What areas are particularly hot for talent?
From M&C Saatchi’s point of view, the higher turnover is at the more junior levels. We’ve had relative stability at the top levels of our companies globally and it’s really at the bottom end that people are reassessing, rather than by job description.
This is not just a UK phenomenon, it’s a global phenomenon—what the HR community are calling "The Great Reappraisal", where people are reassessing and asking: Is this the way that they want to spend their lives and what do they want to do in the future? That tends to be a more fundamental question for younger people is what we’re seeing.
M&C Saatchi broke down revenues by division for the first time at the H1 results. The biggest, Connected Creativity, including the flagship ad agency, generated 51% of net revenue and 33% of operating profit. The other four divisions, Performance Media, Global and Social Issues (including government advisory work), Passion Marketing (including talent and sports marketing) and Brand, Experience & Innovation (including digital experiences) were 49% of net revenue and 67% of profit. Is there an issue around Connected Creativity—that there is not a premium on creative services?
Connected Creativity is running at a 12% margin, which is a respectable margin, and it’s the growth engine for the other divisions as well—not entirely but to some extent [in terms of attracting clients] and it’s the front door for the M&C Saatchi brand, so it’s extremely imprortant in that regard.
I don’t think [lower profitability means] that creativity isn’t valued [by clients]. The value equation for creativity is one that’s been fought by agencies and will continue to be fought for the coming years—in terms of trying to move from a time-based to value- and output-based [remuneration].
The other interesting thing is going to be operating in an inflationary environment—if that’s the case and inflation is not a short-term phenomenon. Building back inflationary increases in income [by pushing through fee increases for clients] will become critical and is something that perhaps agencies haven’t been used to in the last decade.
M&C Saatchi is on the stock market and we’ve seen a tremendous amount of M&A and investment activity in other areas of advertising, particularly in the adtech sector, and a lot of private equity interest outside the stock market. What’s the benefit of M&C Saatchi being on the stock market? Is there any reason to consider anything different in terms of ownership as you simplify the business?
We’re not considering anything different and the simple answer is access to capital in the medium term [by staying on the stock market].
Hypothetically, what might that access to capital allow you to do? Sir Martin Sorrell’s S4 Capital has made more than two dozen acquisitions in three years and grown rapidly on the stock market.
In terms of capital allocation, we’ve made it fairly clear in the short term that the aim is to eliminate dilution [by using cash to pay agency entrepreneurs, rather than issue extra shares as the company has done previously].
There’s also organic growth and investment in the business, future dividends [as payments to shareholders are likely to restart now that the finances are stronger] and M&A activity will be on the radar for 2022, but it’s too early to talk about the details of that.
On dilution, you say this is a very significant moment. Earlier this year, M&C Saatchi warned about a heavy risk of dilution—with the share value potentially being diluted by nearly a quarter. Knowing there are quite a lot of agency entrepreneurs who have share options across the M&C Saatchi network, why is this change significant in terms of paying cash to them and how will it benefit existing shareholders?
The existing shareholders won’t get diluted—that’s what critical for them [in future].
In terms of those [agency entrepreneurs who are] option holders and receiving additional shares for their options [as part of earn-outs and long-term incentive schemes], that was diluting. In terms of being a barrier to future investors, as well as problem for existing investors, that will disappear. And for people within the business, there’s no downside, they’re getting cash, rather than shares.
It reflects the confidence and strength of the business that we are willing to make this statement.
The last thing I’d say is it is an important moment as it is a return to growth for our business after the hiatus in 2019 [with the accounting problems] and Covid in 2020 and our restructuring [as M&C Saatchi closed and merged around 20 subsidiaries last year].
And with this strategic decision to settle put options in cash, it’s strategically an important moment for the company to allow it to move forward.