15 April 2019 by jbchevrel
Today the Main rebounded +1.75bp, after dipping c15bp in three weeks. Constituents, as an aggregate, were little changed (+0.3bp), but it is worth noting that Publicis (PUBFP) underperformed, in that respect, with its 5y CDS wider by 7bp. This is after PUBFP confirmed over the weekend that it will acquire Epsilon from Alliance Data for $4.4B (c10x EV/EBITDA) in cash, the deal is expected to close in Q3. Not an outright surprise, as PUBFP had said it was considering it (Reuters Apr 2). Epsilon is a major US player in data and targeted marketing solutions, so it confirms PUBFP willingness to take the digital turn. As both Laurent (Feb 12) and myself (Jul 19) have previously mentioned in this blog, the advertising sector is challenged (data-protection regulations, competition from tech and consulting firms), and there is a need for renewal. In this respect, the faster-growing digital segment can prove a decisive part of PUBFP strategy. That step helped PUBFP stock price (up almost +5% this morning) while it was -10% (same CDS move) on Jul 19. The deal will effectively cost $4B, after considering the tax step-up. Clearly lower than the $5B initially reported, on Apr 2. While PUBFP confirmed its 2019 outlook, this acquisition comes at a time when the company struggles to grow organically. Indeed, Q1 revenue slowed -1.6%, following Q4 -0.3%. The deal will be financed by cash and a 1y bridge loan (which has the potential to be renewed 2 x 6 months). PUBFP might end up finishing the bridge loan with senior bond debt issuance. Senior bonds could underperform in that case, it is worth noting that the latter ‘already’ trade c20bp tight to the CDS (looking at the 1 5/8 Dec24s). The operations takes PUBFP leverage immediately up to 1.8x from 0.8x, as of end-18 (€4.9B debt, €3.2B cash & equiv and €2.2B adj. EBITDA). PUBFP management is still committed to keep its BBB+s/Baa2s rating and expects full deleveraging after 4 years. To balance the impact for credit investors, PUBFP will suspend its share buyback plan, although it still is committed to its 45% dividend payout ratio, for the time being.