425
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pr4255.txt
Filed by WPP Group plc
Pursuant to Rule 425 under the Securities Act of 1933
Subject Company: Grey Global Group Inc.
Commission File No.: 0-7898
Transcript of WPP Presentation to Analysts
Acquisition of Grey Global Group Inc.
Martin Sorrell: Okay, I'll kick off and just one thing Paul, hopefully, you
can hear me, I'll act as your slide pusher for the presentation.
"INVESTOR INFORMATION" you don't want me to read that so that's on the
front. We've got four sections to this presentation on Grey. Firstly,
"Transaction Overview"; secondly, Strategic Rationale section on strategy;
thirdly, we're going to illustrate the Financial Impact of the deal, and
Paul will cover that. I'll cover the first two and then we'll come back
here, hopefully, for some "Closing Remarks."
On the overview, we believe that Grey represents a highly complementary
strategic fit. It has a very strong client roster which includes Proctor &
Gamble which is the world's largest advertiser with I think spending around
the $4.5 billion to $5 billion mark. And just to say P&G interestingly does
not work above the line with any of the top three groups. Its principle
other agency is Publicis which is number four. So neither Omnicom or IPG or
WPP currently work for P&G above the line. We do have a relationship with
P&G below the line in a number of areas.
In addition to P&G, 3M, Adobe, BellSouth, Boehringer Ingelheim, which is in
itself in the middle of a consolidation, Conagra, Hasbro, JPMorganChase,
Mars, and Warner Brothers. Those are clients that we have relationships
with, but represent really new opportunities for us in segments of our
business, e.g., P&G, above the line.
The second point is that we will have, we believe, as a result of this
transaction, a strengthened relationship with many of our major
multinational clients. These are existing clients that we operate with in
advertising, for example, or in below the line, and where there is a
complementary relationship with Grey, BAT, Diageo, gsk, Nokia and Pfizer.
Pfizer and Pharmacia and of course Pharmacia is being consolidated into
Pfizer.
The third point is that we believe that Grey has strong brands in
advertising. A very strong brand in media investment management in the
guise of or in the form of MediaCom. A very strong healthcare business,
which I just got an email before we came here today from Lyn Vos who's
celebrating the partnership with a big healthcare win today actually. And
Direct and Interactive strong, will come on to that in a minute, very
strong direct and interactive business, an internet business, and then
other businesses in sales promotion and public relations.
We believe as the result of the transaction, we will have enhanced
long-term growth prospects. And I think I'd emphasize the word "long-term."
Often in these, and in some of the comments that we've seen historically on
this in the last two or three months has been, I think the focused may be
too much on the short term areas. As a shareholder in WPP, I would say that
WPP is a stronger company cum Grey than without Grey in the long term, as
you look at client pattern, if you look at functional strengths and
geographic strengths. So enhanced long-term growth prospects and a
significant increase in the group's talent resources. There are 10,000
people in Grey and a lot of very talented people. So the total head count
of the group will be about 60,000 people and if you include associates, it
would be 80,000. And significant opportunities as we know for cash flow and
margin enhancement, Grey's margins historically have been around five or
six percent they're running at the moment we think this year they will be
about eight to eight and a half percent and Paul will come on to that when
he goes into the financial part of the presentation. The transaction will
be accreted to earnings in 2005 with additional accretion in 2006 and 2007
and in terms of probably the more important calculation that's Return on
Investment or Return on Average Cost of Capital, we believe that we will
more than cover our cost of capital by 2007 on the basis of the assumptions
that we present today. So some of you may regard those as being optimistic,
some of you may regard them as being conservative so you make your
calculations on that basis.
A few comments on the key terms. You have it in the press release. You've
seen it commented on in the wire services this morning, the offer value in
equity terms is $1.52 billion, that's based on $1.512 million fully diluted
Grey shares. That's comprising 50 percent cash, $760 million in cash, and
$760 million in new WPP shares half-and-half and that's based on a closing
price on Friday night of WPP at 514p per share and represents a fixed
exchange ratio. I mean shareholders will have the option of asking for more
cash or more shares and obviously we will move up and down what is paid to
each shareholder and that basis, but the overall limit is 50-50. Now this
represents an enterprise value of a slightly lower figure of $1.309 billion
which takes into account cash balances on the balance sheet, "What? As of
June 30th, Chris?" "Yes?" -- that's right, June 30th balance sheet, of $172
million and option proceeds of $39 million. So enterprise value of $1.3
billion and the consideration represents on a per share basis $1,005 per
Grey share. The cash consideration will be funded from WPP's existing
resources and as a result of the transaction, Grey shareholders will earn
approximately 6.5 percent of the enlarged WPP. This represents a tax-free
transaction to Grey shareholders to US shareholders given the 50-50 mix of
stock and cash and we expect closing towards the end of the year, December
2004 or January of 2005.
On management, on slide seven, Ed Meyer has entered into a new employment
contract for 2005 and 2006. He will continue as Chairman and CEO of Grey
Global Group that is the parent company of the Grey units that I'll come on
to in a minute and of course he will assist with or start us on the
integration of Grey into WPP and he will be offered a position on the Board
of WPP in due course when an appointment has been made to the Chairmanship
and CEOship of Grey Advertising, which is one of the bigger units in Grey
Global Group. Steve Felsher who is the Chief Financial Officer of Grey
Global has been immensely helpful and responsive in our due diligence and
negotiation and other senior management of Grey will continue under their
existing contract arrangements. As far as incentive remuneration is
concerned, the current Grey equity incentive programs will remain subject
to the existing vesting schedule. So if they have vesting schedules on
incentives or bonuses they have received historically they will remain in
place they'll effectively be rolled over. And the same thing applies in
time to Grey's existing incentive program, but that will be transitioned to
WPP's incentives as appropriate in the future.
As far as "integration" is concerned, it's probably a misnomer, it's a
misleading word, I mean there's very little integration that will take
place. We will keep Grey Global Group as I indicated as a unit. The
operating companies within that unit, which I'll come on to in a minute,
will remain separate and will continue to report to the CEO of Grey, that's
Ed. And MediaCom, which is one of the constituent parts, will explore
opportunities to leverage the media buying efficiencies that are clearly
available through Group M. So the management of MediaCom under Alexander
Schmidt Vogel will explore with Irwin Gotlieb what can be done to leverage
our considerable media buying power as a result of this transaction. I know
we don't reveal the revenues of our media operation but I'll destroy the
habit of a lifetime by giving you the figure; it's about $900 million is in
our media investment management operation. MediaCom's media investment
management revenues were about $300 million. So that the combined revenues
of all of our media units, excluding KR Media, which is just starting to
sell it's MAXUS, Mediaedge:cia, MindShare and MediaCom, will be $1.2
billion, which will place us in a very powerful position. Now that is
revenues, not billings and you can refer to RECMA for rate card I think it
is, analysis of Media. The public company reporting responsibilities of
Grey obviously will be integrated into WPP and there will be some savings
there. And there will be some opportunities with the IT infrastructure and
property portfolios that's integrated across the business. So that's a
little bit of the background. As far as strategic rationale is concerned,
we believe that Grey Global represents a number of very strong business
units within an integrated group. You can see here several of the units,
not all of them, several of the units that Ed in his presentation
historically has emphasized. Grey Worldwide, which is the advertising
agency, MediaCom, the media planning and buying business I just mentioned a
very strong direct and interactive business, Grey Interactive and G2. G2 is
the agency that handles the bulk of the BAT business, for example, which
Ogilvy now with 141 handles on the WPP side of the fence. GCI, strong
public relations business, with a good position in the marketplace and then
Grey Healthcare Group. Now Grey Worldwide and advertising agencies ranked
about seven. Some of these stages are a little bit historic because of the
Sarbanes Oxley limitations that we've put ourselves under. And MediaCom is
number nine. There's no ranking for direct or GCI currently of any
substance available. And then as far as healthcare from Med Ed News, Grey
Healthcare is number five. And you can see some strong clients some of
which are shared across the group, for example, Gsk you see is in four out
of the five divisions. I won't dwell on the client list. In terms of
complementarity to WPP and our leading brands, you see, in Advertising,
Grey Worldwide will line up against our existing brands of Thompson, Y&R,
Ogilvy, and Red Cell. In Media Investment Management, I've already
mentioned MediaCom, MindShare and Mediaedge:CIA and we have MAXUS as well,
which we're developing. In Public Relations & Public Affairs, GCI against
our brands there. And then Branding & Identity Healthcare & Specialist
Communications: the healthcare group, Grey Interactive, Grey Direct, and
G2. In terms of clients obviously the new relationships with major
advertisers, when I say new relationships we do tend to have relationships
with most of these people, but in new areas obviously between P&G, 3M,
JPMorganChase and Warner Brothers, common clients in existing areas or in
areas that we both operate in GSK, BAT, Nokia, Pfizer and Diageo and
obviously we have as, just going back one, if you look in terms of direct
G2, Gi gives us an interesting opportunity to manage conflict in the direct
area. You remember that we had two very strong global direct interactive
internet businesses, Wunderman and Ogilvy One, and that's obviously one of
the heavy growth areas and we see Grey's direct operations as being a
significance in that.
In terms of geographical split, interestingly Grey's business is slightly
bigger in Europe than North America. It runs roughly 45-45-10 percent split
with 10 percent being Asia Pacific and Latin America, but it has a powerful
U.S. integrated business. A strong European business with particularly
strong presences in the UK, in Germany and in Scandinavia and has a strong
business in Asia Pacific with revenues of $130 million in the faster
growing markets. So Asia and Latin America together are about ten percent
of the business, so it's 45, roughly 45, 10.
In terms of function about 60 percent of the business if you do the math
from what I told you about MediaCom it's about 40 Advertising, 20 Media and
then the balance in what we call Marketing Services direct and interactive
just over 10 percent, PR just below 10 percent, healthcare just over 10
percent, and others in the promotion and related businesses just under 10
percent.
Grey Synchronized Partners which is sort of the parent company for Direct,
G2 and Gi gives us another strong direct and interactive business as I've
mentioned. Healthcare business is an excellent business to work alongside
our other healthcare brands such as CommonHealth, HealthWorld and Sudler &
Hennessey. HealthWorld we're aligning more and more to Oglivy, and Grey
Healthcare is particularly interesting because it has an international
business as well as a domestic business and what we've seen is a first
phase of consolidation amongst the pharmaceutical companies, the healthcare
companies in the United States, and what we're starting to see is the
healthcare companies starting to consolidate their business internationally
as they move abroad more intensively and as they spread abroad. So,
international network, such as Sudler has and such as Grey Healthcare has
and HealthWorld has are going to become more and more important.
CommonHealth is much more focused on the United States. GCI has a, in the
public relations business, has an excellent roster of healthcare and
technology clients and is an important addition to our public relations
portfolio. Much has been made about whether this is a must-have or a
nice-to-have, much has been made about whether it fits in strategically or
not, it really doesn't move the needle as I said before much one way or the
other. I don't like that phrase "developing markets," it's really the
faster growing markets. Our objective in the long term is for them to be
one-third, that's not just Asia and Latin America, Africa and the Middle
East, it's Russia and the CIS countries too and you can see pre-Grey on the
left-hand side. You can see that about 42 percent of our business that was
in North America, 41 percent in Europe and 17 percent in the rest of the
world. If you include associates, it was up about 24 percent. Combined, it
really doesn't move it one way or the other it's just an odd percentage
point here or there. Our objective remains the same. I just make the point
that Grey has a good business in Asia, it has a good business in Latin
America and this will further strengthen our operations in that part of the
world.
In terms of marketing services where we want to be two-thirds of our group
in marketing services for reasons we well-rehearsed before. You can see
before the deal, advertising was 47-53. It's now moved two percentage
points the other way 49-51. So, we're still more heavily concentrated in
that outside marketing services and our objective remains two-thirds, at
one-third. In terms of measurable quantitative disciplines, we remind you
what they are direct, internet, interactive, what we call information and
fact consultancy, which is market research that was 35 percent, it goes
down to 32 and again our objective remains 50-50.
Paul, I'm tempting providence, but are you there and ready to do the
"Illustrative Financial Impact"?
PAUL RICHARDSON: Okay. Yes, Martin I'll do the three slides on the
financial impact and one slide, if I can, on the timetable and then hand
back to Martin and Ed who now just joined us for a Q&A. On the Illustrative
Financial Impact what we've formally have presented is the '03 numbers for
illustration. This is obviously because we both have given you a full year
reported numbers where the revenues of our own business were (pound)4.1
billion and Grey is about (pound)800 million. You can see there the
respective margins of these businesses and what it would have done on a
combined basis. We're not permitted to give a full year forecast to Grey,
as such, but we've seen the half-year performance and what we've worked on
is a sensible amount of synergies that we can see from the business. You
may recall that in the Cordiant deal, a business of much smaller size, we
committed to about (pound)14-15 million of synergies. On this deal we've
committed to around $20 million at this stage and again in comparison to
Y&R the commitment is around $40 million. So I think it's a sensible
synergy and savings figure without being excessively prudent. In terms of
the tax rate, as you know, Grey's rate has historically been quite high
around the 50 percent. What we've assumed is a more normalized tax
structure because the operating performances and efficiencies in certain
markets and not disadvantaged by certain loss making jurisdictions so one
can assume a normalized tax rate for international group of around 42
percent and adding the leverage that we have to this deal, i.e., 50 percent
cash/50 percent equity, would bring the rate naturally down to 38 percent.
When we add that to the group's existing tax rate, the combined tax rate
will be 27 percent going forward. So in terms of other opportunities, we
see further opportunities for margin improvement. Again, we have laid this
out for you. Through staff productivity combining property and IT
infrastructure and assets of combined purchasing arrangements globally.
Grey had (pound)95 million of net cash on the balance sheet. This does
assume both the convertible and the long-term debt of fully recorded as
obligations so that is the figure we have assumed as available for the
business going forward and I think there will be further opportunities of
working capital given the power of MindShare and MediaCom and Mediaedge in
terms of how they performed and working capital, historically.
Moving on to slide 20. Again I'll reiterate the combined business on 2003.
We haven't given you an '04 consensus yet because Grey there isn't a
consensus in the marketplace. People know our own situation, which is a
13.8 percent margin commitment for '04. On a combined basis, looking at
half-margin point improvement to 14.5 percent in '05 and 15 percent in '06,
we've given you what we believe to be sensible realistic projections to
Grey's future margin performance as a result of the deal and the
opportunities going forward at 10.5 percent in '05 which on a combined
basis would make the group's margin 14 percent and then growing by a
further half percent to 14.5 percent on a combined basis in '06. As Steve
can elaborate later in the Q&A, we made significant progress at Grey in the
first half of '04 with strong margin and revenue growth recorded. Post 2006
there will be further improvements in Grey margin we believe of one percent
per annum toward the WPP levels. As you mentioned again clearly the press
release and analysts have already made an assumption of the accretion in
the range of two to four percent. It will be accretive to earnings
immediately in the first year in '05 with further accretion achievable in
'06 and '07. In terms of return on investment, will be above our weighted
average cost of capital within three years.
Again you can work out the mathematics. The one thing I would say, I think
it is fair to use the group's tax rate of 27 percent in using that
calculation and as a result of the deal the overall tax rate for the
blended weighted average costs of capital will come down for about 8.3 to
8.1. And based on these projections, you'll be able to work out where we
are but I am very confident we can reach that cost of capital within three
years. In the long term, our margin goals remain unchanged.
Moving on to Slide 21. Again, to just try to summarize schematically what
was in the press release. So total consideration of $1.52 billion less
option proceeds, less cash on Grey's balance sheet, which is net of all
debt of $172 million coming down to an enterprise value of $1.3 billion
which we will fund both in new shares of 82.2 million, not all immediately
issuable. Some relate to options, some relate to restricted stock and in
cash resources from our internal cash and facilities. So, there is no need
to access the bond or banking market to complete the transaction of $549
million.
Just finally, moving on, if I can, to the timetable on Slide 23. The next
deal of signing has been completed. The next stage is to issue a proxy
statement to the shareowners of Grey we are fortunate in having both WPP
and Grey's audited half-year numbers to work with so there will be no delay
once we actually get to the right calendar point. That document will go out
as soon as possible. It will be subject to any SEC reviews and neither Grey
nor ourselves have had significant reviews recently and that is always a
possibility. That document will be very full with all the hard numbers and
all the risk analysis. At the same time, we are making a filing with the
European Union. We have to pull together that information which may take up
to three weeks and then there's the stage one process which they are
allowed thirty days to review the information. And after that thirty days,
you're either clear to go ahead or you proceed to stage two with a further
thirty-day review. We've never been taken to stage two in the past and
don't expect to, but there's always a possibility. After the filing of the
proxy statement I think there's twenty-one clear days, approximately thirty
calendar days before the shareholder vote, and after the shareholder vote,
we'll be cleared to close. So that gives you an idea of the timetable and
issues, there's obviously also a Hart-Scott-Rodino filing in the U.S. as
well. And with that Martin, we'll have the hand back to you for closing
remarks.
Martin Sorrell: Thanks Paul. You just saw Ed Meyer joining Paul and Steve
Felsher. As I've said, Ed has been at an employee people meeting in New
York, not specially convened for this, but was going on anyway and just
went to talk to his people there or our people now. As Paul said we'll
expect closing toward the end of the year either December 2004 or January
2005. Just in summary, impact on our strategic goals, our three strategic
goals, is largely neutral, but we do think there's a significant enhanced
opportunity for revenue growth, not only in advertising, but in public
relations and healthcare direct international interactive and of course,
probably most importantly of all, in media investment management. I'll come
on to that in a second. WPP will continue to generate strong cash flows as
a result of the deal. Operating cash flow will be used to support our
strategies through both our acquisitions and continue our progressive
dividend policy and continue to share buyback programme. So we'll balance
that. We will have as a result of this transaction, a clear leadership
position in media and that will generate significant benefits we think for
clients and as a result a faster growing media business.
At the financial model, a couple of journalists have asked today "Have you
run out of acquisition opportunities?," use situations or circumstances
like this to ask the question. The answer is that what we feel are
financial model that we've discussed with you before that is a naught to
five percent organic growth -- revenue growth. A half of a percentage point
50 basis point margin improvement per annum and is sufficient together with
a five percent incremental revenue growth from both our acquisitions and
we'd be very happy to sustain in the long-term ten to fifteen percent
earnings per share growth, which I'm sure a lot of other people would too.
INVESTOR INFORMATION
This communication is being made in respect of the proposed merger
involving WPP Group plc and Grey Global Group Inc. In connection with the
proposed merger, WPP and Grey will prepare a registration statement on Form
F-4 containing a proxy statement/prospectus for the stockholders of Grey to
be filed with the SEC, and each will be filing other documents regarding
the proposed merger, with the SEC.
INVESTORS ARE URGED TO READ THE PROXY STATEMENT/PROSPECTUS WHEN IT BECOMES
AVAILABLE AND ANY OTHER RELEVANT DOCUMENTS FILED WITH THE SEC BECAUSE THEY
WILL CONTAIN IMPORTANT INFORMATION.
Investors will be able to obtain the documents free of charge at the SEC's
website (www.sec.gov). In addition, documents filed with the SEC by WPP may
be obtained free of charge by contacting WPP at 125 Park Avenue, New York,
NY 10017, +1 212 632 2200. Documents filed with the SEC by Grey will be
available free of charge by contacting Grey at 777 Third Avenue, New York,
NY 10017, +1 212 546 2000.
INVESTORS SHOULD READ THE PROXY STATEMENT/PROSPECITUS CAREFULLY WHEN IT
BECOMES AVAILABLE BEFORE MAKING ANY VOTING OR INVESTMENT DECISION.
Grey and its directors and executive officers may be deemed to participate
in the solicitation of proxies in respect of the proposed transactions.
Information regarding Grey's directors and executive officers is available
in Grey's Amendment to their Annual Report for the year ended December 31,
2003, which was filed with the SEC on April 29, 2004. Additional
information regarding the interests of such potential participants will be
included in the proxy statement/prospectus and the other relevant documents
filed with the SEC when they become available.
Private Securities Litigation Reform Act Safe Harbor Statement
The statements, analyses, and other information contained herein relating
to the proposed merger and anticipated synergies, savings and financial and
operating performance, including estimates for growth, trends in each of
the operations and financial results, the markets for products, the future
development of business, and the contingencies and uncertainties of WPP
Group plc and Grey Global Group Inc. to which WPP and Grey may be subject,
as well as other statements including words such as "anticipate,"
"believe," "plan," "estimate," "expect," "intend," "will," "should," "may,"
and other similar expressions, are "forward-looking statements" under the
Private Securities Litigation Reform Act of 1995. Such statements are made
based upon management's current expectations and beliefs concerning future
events and their potential effects on the company.
The forward-looking statements are subject to various risks and
uncertainties, many of which are difficult to predict and generally beyond
the control of WPP and Grey, that could cause actual results to differ
materially from those expressed in, or implied by, the forward-looking
statements.
These risks and uncertainties include those discussed or identified in the
public filings with the U.S. Securities and Exchange Commission made by WPP
and Grey as well as those associated with the realization of expected
earnings accretion, margin improvements and cost savings, synergies,
efficiencies and other benefits anticipated from the merger, including the
risk of loss of key employees and client business in connection with the
transaction and the risk that the completion of the merger may be delayed
for regulatory or other reasons.
Neither WPP nor Grey undertakes, and each specifically disclaims, any
obligation to update or revise any forward-looking information, whether as
a result of new information, future developments or otherwise.