Saatchi misses out on industry boom: Deep-seated US problems offer little prospect of boosting profits

SAATCHI & SAATCHI, the troubled advertising group, is expected this week to warn its bankers that there is little hope of significantly improving its financial performance in 1994.

The company's gloomy outlook is in stark contrast to improving conditions in the US and UK advertising markets, which has fuelled a surge in agency stocks.

However, confidential budgets prepared for Saatchi's bankers suggest that it is unlikely to lift its underlying performance for at least another year, further pushing back repayment of its estimated pounds 160m bank debt.

The group is understood to be forecasting no significant rise in revenues, operating profits or margins because of deep-seated problems at its US agencies and a grim trading environment in continental Europe.

Although Saatchi, best known for its British Airways campaigns, is not in danger of breaching its borrowing conditions, the news is likely to spark renewed concern among institutional investors about its slow recovery.

Last December, the company shocked the market with a thinly disguised warning that forced analysts to slash their pre-tax profit estimates from pounds 25m to about pounds 18m, compared with a pounds 600m loss in the previous year. The warning pushed Saatchi shares from 185p to a low of 134p. Since then they have been buoyed by hopes that it had finally turned the corner after receiving hundred of millions of cash injections in the past four years.

But the group's report to banks assumes that profit margins will barely change from about 6 per cent, implying virtually stagnant operating profits of about pounds 47m this year.

As a result, there are growing fears that it could again disappoint the market. City analysts are looking for pre-tax profits of about pounds 33m for 1994, but they may slash forecasts after Saatchi announces its 1993 results next month.

Senior executives at the group blame much of Saatchi's under-performance on its US agencies, which have steadily lost market share and key clients - including Helene Curtis, the cosmetics firm, and Chrysler, the car maker. These accounted for a combined pounds 30m in client billings. Such losses have been compounded by failure to win big new accounts.

Bob Kennedy, chief executive of one of Saatchi's main US networks, was forced into retirement last month after serious differences with Charles Scott, the group chief executive, over the agency's performance.

The company is struggling to shake up its three networks in the US because of staff resistance in New York, which accounts for much of its North American operations. The restructuring plans involve merging the networks' media-buying departments into a single unit along the lines of Zenith, its European media-buying subsidiary.

Saatchi was expected to use part of its pounds 73m rights issue last May to expand Zenith into the US, but these plans have yet to get off the ground. Last week, the group despatched Derrick Southon, a senior Zenith executive, from London to bang heads together. He is expected to report directly to Mr Scott within the next three months, but few insiders expect that there will be a quick end to the stalemate.

Meanwhile, Saatchi continues to be wracked by board-level rows between between Mr Scott, an accountant brought in to sort the group four years ago, and Maurice Saatchi, the group's co-founder and chairman.

In December, Maurice's brother, Charles Saatchi, was forced off the board after Mr Scott insisted that they vacate their palatial offices at Berkeley Square in London's Mayfair, to help reduce costs.

Since then, there have been persistent rumours that the brothers were plotting a pounds 200m management buy-out of Saatchi & Saatchi Advertising, one of the group's main agency networks.

There is also some talk that the company could change its name in order to reflect the dilution of the Saatchi brothers' influence.

The clashes are understood to be strengthening the authority of Sir Peter Walters, the former chairman of British Petroleum and a senior City figure, who joined Saatchi as a non-executive director late last year.

(Photograph omitted)