WPP chief Sir Martin Sorrell confirmed on Tuesday morning that his company is indeed interested in making a bid for Dunnhumby, the data and customer loyalty business owned by the UK’s biggest retailer Tesco.
But it is unlikely the world’s biggest advertising agency network will look to take a 100% stake in Dunnhumby, which Reuters sources have valued at £2 billion ($US3 billion.)
Here’s why, taking all angles into account.
WPP is an extremely acquisitive business. Last year it made 64 M&A deals, according to Mergermarket and Clarity research, equivalent to 48% of the total deals made across the big six global advertising agency networks in 2014. WPP plans to spend a further £300 million to £400 million on acquisitions in 2015, the company confirmed on its latest earnings call.
But a lot of the recent deals WPP has completed haven’t been 100% takeover deals: Back in September WPP invested $US25 million in cash for a 15% stake in adtech company AppNexus; in October, it took a 16.7% stake in television measurement firm Rentrak in exchange for WPP’s Kantar Media US TV measurement business; and most recently WPP undertook another complex deal that will see it owning between 15% and 19.9% of US-based internet measurement company comScore.
As Sir Martin Sorrell said on WPP’s fourth quarter earnings call: “We are not big plonkers. We don’t plonk down large amounts of cash to 100% acquire particularly public companies with limitations on how earn-outs can be structured and of course, on people. If you look at these technology companies, a very significant amount of the costs each year are share substitutes. Share-based compensation plays a very big important part, and paying 100% upfront for a company does leave you particularly vulnerable in the big tech area.”
Dunnhumby isn’t a public company, but it is majority-owned by Tesco, which is. Given WPP’s recent acquisitions in what it describes as the “new media and data investment management” space, it is likely a deal with Dunnhumby would follow a similar, less risky path of taking small stakes, coupled in with a long-term partnership agreement.
Dunnhumby rightly has a high market value. It is the company that invented the Tesco Clubcard loyalty program in 1994. Besides that, it has data on almost 1 billion shoppers worldwide and a set of advanced analytics tools that help brands set their prices, choose which products to launch next, and make decisions on setting promotions. Its clients include Coca-Cola, Procter & Gamble, and Diageo.
But handing itself over fully to WPP might be a difficult cultural fit for the 26-year-old Dunnhumby, which has more than 3,000 employees worldwide.
Stuart Evans, director of the global loyalty practice at ICLP Loyalty, told Business Insider: “[A full takeover would] be a cultural inversion, from a business that has been very successful, somewhat comfortable, and extremely profitable almost by default to one that now needs to meet the WPP financial performance and sales growth targets, every week and month.”
Evans estimates Dunnhumby makes £50 million in profit per year.
He adds: “Loyalty, however, is a strategy not a tactic and as such can’t be ‘sold’ by hunter closers as a service to clients. [Loyalty] needs nurturing and farming given it is highly consultative in nature, it is not just designing campaigns and cards. The uncomfortable clash of cultures may well be most apparent in the weekly group sales meeting and end of month EBITDA reviews, close scrutiny of which drives the financial success of WPP.”
Tesco, which first took a stake in Dunnhumby in 2001 before taking full control of the business in 2004, has indicated it is exploring all options, including a full sale, a partial sell-off, or a float on the stock market.
The ailing supermarket is essentially looking to take the least painful path for turning around its business, having announced a £250 million over-estimate in its profits in September and successive like-for-like sales declines. Its turnaround plan so far has included the closure of unprofitable stores, cancelling new store openings, reducing capital investment, and selling off its entertainment streaming service Blinkbox to UK telecommunications company TalkTalk for £5 million.
But a simple sell-off of Dunnhumby might not be as straightforward.
Clive Black, head of research at Shore Capital Stockbrokers, told Business Insider: “Clearly Tesco will be looking for considerable protection whoever buys Dunnhumby because it is holding global data proprietary to Tesco at the minute, and in that respect it’s not as straightforward a deal as people might think. Tesco has indicated it is interested to sell part if not all of Dunnhumby and we expect a lot of potential suitors. I’m not sure there’d be huge regulatory issues, but to my mind it’s more about the comfort Tesco would want.”
If Tesco were to shed Dunnhumby 100%, it would then need to become a Dunnhumby client for the supply of data and marketing services for Clubcard, which would come at a cost to both Tesco and its clients.
ICLP Loyalty’s Evans believes the majority of Dunnhumby’s profit comes from reselling Tesco’s insight and data to CPG (consumer packaged goods) companies, so a full sale would further complicate the matter: “How can Tesco sell that or who would buy it knowing they would be locked into a service contract at exceptionally low rates presumably — even if it gives that business Tesco as a reference client and potentially a loss leader therefore?”
WPP isn’t the only company with an interest in buying up Dunnhumby. But the complexity of its business and its relationship with Tesco means, whatever the outcome, the next stage for Dunnhumby won’t be a straightforward sale.
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