Bottom Line: Subsidiaries cushion WPP

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The Independent Online
WHILE WPP has been grappling with a huge debt burden over the past three years, its two creative networks - J Walter Thompson and Ogilvy & Mather - have shown impressive resilience.

The secret of the subsidiaries' success is that they boast some of the world's biggest multinational spenders on advertising, such as Unilever and Ford, which have cushioned WPP from the worst effects of the recession.

Just as important, the networks have evolved over several decades and were left intact by WPP after their purchase. This meant that they largely escaped the culture clashes that often erupt when networks are built - as in Saatchi & Saatchi's case - through acquisitions.

Both JWT and Ogilvy have a high exposure to emerging markets of the Far East and Latin America, where they experienced strong growth in the first half.

WPP also has a strong involvement in 'below-the-line marketing' companies, which have delivered a robust performance amid the recession.

Small wonder, then, that the group increased its revenues by nearly 5 per cent in the first half, well up with the industry average.

Less impressive are operating margins. Excluding severance costs, although up from 5.8 to 6.6 per cent, they are still considerably lower than those of WPP's competitors in the US and are unlikely to reach double digits until at least 1995. Hill & Knowlton, its public relations arm, has also been a poor performer, incurring a near- pounds 5m operating loss in the half-year.

However, WPP's biggest millstone remains its huge debt burden which, despite the rights issue, averaged about pounds 330m on a pro forma basis against negative shareholders' funds of pounds 160m. WPP still has to find pounds 38m in respect of earn-out payments over the next two years.

Given that a dramatic recovery in the world's main advertising markets looks highly unlikely next year, further inroads into debts might necessitate disposals and another equity issue.

WPP's shareholders are already tired of waiting for disposals. The planned sale of SMS, the second-line agency, has been on the cards for well nigh two years.

The shares have already seen sparkling gains this year but are likely to mark time in the short term. Most of WPP's banking syndicate plan to offload a substantial part of their stake in the company on conversion to ordinary shares next month.

But WPP, up 3p to 93p yesterday, still offers long-term value given its earnings prospects.