IPG
Fitch Ratings has affirmed Interpublic Group's (IPG) Long-Term Issuer Default Rating (IDR) at 'BBB+' following the announced acquisition by Omnicom Group Inc.
Fitch has also affirmed the senior unsecured instrument ratings at 'BBB+' and the Short-Term IDR and commercial paper (CP) ratings at F1. The Rating Outlook Is Stable.
Omnicom has agreed to acquire all IPG shares in an all-stock transaction. Fitch views the merger positively due to enhanced scale, operational efficiencies, a robust financial position, and the leveraging of advanced AI capabilities. However, there are integration and execution risks, as well as uncertainties regarding the timing, cost and realization of operational efficiencies. The transaction is expected to close in 2H25 following regulatory approvals and other customary closing conditions.
IPG's ratings continue to reflect its position as a leading advertising agency holding company, with revenue diversification and credit metrics that are generally consistent with the 'BBB+' rating.
Key Rating Drivers
Increased Scale Post-Merger: IPG's merger with Omnicom will create the world's largest advertising agency holding company, with combined revenue of $25.6 billion, EBITDA of $4.3 billion, and FCF of $3.3 billion for LTM September 2024. Fitch believes the merger will enhance scale and operational efficiencies, with expected cost synergies of $750 million within 24 months of the transaction close. The combined entity will be able to leverage its resources to advance AI and data capabilities, enhancing its ability to develop innovative products and services for clients.
Consistent Capital Allocation Post-Merger: Fitch notes that both entities currently maintain conservative financial and capital allocation policies and expects these policies to continue post-merger, supporting the stability and predictability of the company's financial profile. The combined entity will uphold Omnicom's priorities of returning capital to shareholders through dividends and share repurchases, as well as strategic acquisitions in high-growth areas. Omnicom has also committed to maintaining its investment-grade credit ratings.
Manageable Acquisition Risks: Fitch believes integration and execution risks are significant but manageable, given the complexity of merging two global organizations. Both entities have strong M&A track records and should be able to effectively manage the merger process. The combined leverage for LTM September 2024 was 2.1x, slightly higher than IPG's standalone leverage of 1.7x but lower than Omnicom's 2.5x. Fitch believes the combined entity will maintain a conservative leverage profile, aligning with its investment-grade commitment.
Stronger Competitive Position: As two of the four largest agency holding companies globally, the combined entity will offer end-to-end services across a diverse geographic reach, broad product lines, and end markets using complementary data and technology platforms, enhancing its competitive position in the advertising market.
Uncertain Pro Forma Capital Structure: The acquisition is an all-stock transaction, with IPG's shareholders expected to own 39% of the post-merger entity. There is limited visibility on the combined entity's post-merger capital structure. Fitch assumes that IPG's legacy debt, comprised entirely of senior unsecured notes, will be pari passu with Omnicom's debt of the same class.
Derivation Summary
IPG's rating reflects its position as one of the four largest GHCs, its diverse client base, and the company's ample liquidity. The ratings also incorporate the cyclicality of the advertising industry and potential top-line volatility due to client wins or losses in any given year.
IPG is well positioned within its rating relative to its industry peers. The company outperformed peers on organic growth pre-pandemic due to its client mix and early adoption of open data infrastructure. However, organic revenue performance has lagged peers in recent years due to headwinds in the TMT sector and cyclicality of the traditional creative agency business. EBITDA margins are in line with Fitch's expectations and industry peers.
Fitch expects steady net revenue growth over the forecast period from client wins, stabilization of marketing spend in the TMT sector and sustained growth in the health, PR and experiential service offerings. Fitch does not rate any of IPG's competitors.
The ratings are not affected by country ceiling or parent/subsidiary aspects.
Key Assumptions
Marginal organic revenue growth in 2024 in line with management guidance, reflecting stabilization in marketing spend by TMT clients and sustained growth in healthcare PR/experiential and retail. Revenue to benefit from historical post-recession sector performance and aided by another year of historic levels of political spending;
EBITDA Margin to improve to 18% of net revenue over the rating horizon due to the company's high operating leverage;
Share buybacks grow in the high teens annually;
Annual dividends increase by about 7.5%;
Normalization of working capital resulting in positive FCF over the rating horizon;
$250 million acquisition in FY2025 to broaden the company's commerce and digital transformation capabilities.
RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
EBITDA margins falling materially below the industry peer range for more than four consecutive quarters;
A debt-financed acquisition causing EBITDA leverage to exceed 2.0x without a credible plan to return leverage below the threshold.
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
Fitch does not anticipate an upgrade at this time given the pending acquisition by Omnicom.
Liquidity and Debt Structure
IPG maintained solid liquidity as of Sept. 30, 2024, including $1.5 billion cash on hand, $1.5 billion available under its revolving facility with no CP outstanding and uncommitted lines of credit of about $794 million. Fitch expects IPG to generate positive FCF in FY2024 as working capital normalizes.
As of September 2024, IPG had $3 billion debt outstanding comprised solely of senior unsecured notes. The company addressed a $250 million tranche of senior notes that matured in April 2024. IPG's debt schedule is clear of maturities until 2028 when $500 million comes due.
Issuer Profile
IPG is a leading global advertising and marketing services company with a focus on consumer advertising, digital marketing, communications planning and media buying, public relations, specialized communications disciplines, and data management.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
MACROECONOMIC ASSUMPTIONS AND SECTOR FORECASTS
Click here to access Fitch's latest quarterly Global Corporates Macro and Sector Forecasts data file which aggregates key data points used in our credit analysis. Fitch's macroeconomic forecasts, commodity price assumptions, default rate forecasts, sector key performance indicators and sector-level forecasts are among the data items included.
ESG Considerations
The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.
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