Investment Column: Sorrell finds it pays to advertise

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The Independent Online
Just weeks after Martin Sorrell raised the question of breaking up his WPP advertising group, Cordiant, home of the original Saatchi & Saatchi, yesterday announced it was doing the very same thing. The two companies appear to be travelling in the same direction, but the reality is very different.

Sorrell seems to have mooted the break-up idea more pour encourager les autres, than as a serious corporate move. He still clearly believes that WPP's head office continues to add value and is not just there to reorder his troops on the battlefield.

Yesterday, reporting sales figures for the opening quarter of 1997, he was pointing out that intra-company activities are actually generating pounds 300m in annual revenues.

WPP and Cordiant come from a similar heritage. Both found that 1980's acquisition binges turned sour when debt repayment costs soared. Mr Sorrell has brought WPP out of the bleak years in much stronger shape than its rival, but he has had great incentives.

Helping WPP to lift pre-tax profits last year by 35 per cent to pounds 153.3m brought him one step further along the road towards an pounds 18m bonus package. But there was only a little to help him yesterday along that path. The shares rose 3p to 250.5p, leaving him still short of the next whack of the bonus, which only kicks in if he keeps the share price above 265p for 60 trading days.

Dented by the strong pound, reported revenues fell from pounds 390m to pounds 387m in the first three months of the year, although like-for-like sales were up 6 per cent. Market research put in a particularly strong performance, with revenues rising 11 per cent, while public relations and media advertising also did well.

The mountain of debt which threatened to topple WPP in the past has halved over the comparable period to just pounds 78m. Gearing is now minimal for a company with a market capitalisation of pounds 1.85bn. Meanwhile, WPP has just acquired its first European-based Internet company, Syzygy, but this is still small beer.

Analysts expect profits of pounds 175m this year, putting the shares on a multiple of around 17 times prospective earnings. That puts it slightly behind the high-fliers in the sector, but is probably fair for now.