Sir Martin Sorrell’s S4 Capital puts brake on takeover spree after profit warning, according to City sources
Warning: Sir Martin is expecting lower profits at S4
Sir Martin Sorrell’s S4 Capital has put a brake on its takeover spree after a profit warning last month, according to City sources.
His London-listed marketing services empire has snapped up more than 30 companies in the past four years. But delays to its results earlier this year and last month’s red flag on profits have seen the share price plummet.
City advisers say that means further deals are on hold, possibly for the next 12 to 18 months, as it focuses on integrating the acquisitions made to date.
Sir Martin, 77, set up the business as a challenger to his previous firm – the world’s largest advertising group, WPP – after his exit in 2018. The takeovers have helped to build S4 into a company with a turnover close to £1billion and 9,000 staff in 33 countries.
Many of S4’s acquisitions, most recently tech services firm TheoremOne in May, have been made by offering an equal split in cash and shares. Other acquisitions include digital and media consultancy MightyHive and content producer MediaMonks. But senior City sources said S4’s weak share price made taking stock in the firm less appealing.
One said the fallout had ‘tainted’ S4’s reputation as Sorrell raced to restore investor confidence. ‘But he’s hard-working and will try to fix the business,’ he added.
In its May update, S4 said it would consider merger opportunities in high-growth areas, such as content and data analytics. On the day its 2021 annual results were released, Sorrell warned that the firm would have to be ‘extremely careful’ about making future acquisitions.
Another source said: ‘The market will kill them if they make another acquisition. All M&A is on hold.’ He added that the company needed to show its multitude of businesses were working well together, which was not a ‘short-term’ fix.
Sorrell last week appointed Colin Day to help steady the ship. Day joined the board as a non-executive director with responsibility for the firm’s audit and risk committee. He is a seasoned City veteran with stints as finance chief of Reckitt Benckiser and Aegis Group. He is also a former director at WPP, founded by Sorrell in the 1980s from a shell company.
Sir Martin has also drafted in Chris Martin – the co-founder of early acquisition MightyHive – as chief operating officer.
Delays to S4’s results were described by Sir Martin in May as ‘unacceptable and embarrassing’. He also admitted to ‘control weaknesses, inadequate documentation and a lack of understanding in the application of the accounting standards’.
This was followed by a profit warning in July after rising costs for hiring new staff forced it to lower full-year guidance on earnings before interest, taxes, depreciation and amortisation from £160million to £120million.
Concerns have been raised that S4’s speedy expansion and its accounting software led to finance staff being overwhelmed and payments to clients delayed. Its shares have fallen more than 77 per cent this year. The price means that it could also attract attention from private equity firms, a banker said.
A source said S4 needed to fix its software and figure out how it will control its businesses from one central platform, adding that it could take at least 24 months to pull off. ‘The business should be fine over time, but I can’t see it coming back to being a £5billion company,’ he said.
S4 declined to comment.