Ad Mogul Sorrell’s Post-WPP Revenge Falters As Share Price Tumbles

After his ‘disruptor’ S4 Capital hit record lows, the vaunted adman plans for a ‘year of efficiency’ 

(Bloomberg) — At an advertising festival in France in June, industry luminary  Martin Sorrell was asked about artificial intelligence. He couldn’t resist bringing up his old company.

Automated technology could eventually replace nearly half of the jobs at WPP Plc, the media giant Sorrell ran until 2018, he said. He thought his new firm, S4 Capital Plc, was better positioned to adapt. “It’s a torpedo boat versus an aircraft carrier,” he added.

When asked about Sorrell’s predictions, one WPP executive quipped that Sorrell should spend more time thinking about his share price.

At that point, S4 shares were trading at £113.90, about 36% from their IPO price. Today, they’re nearly half that price. Shares hit a record low last week after S4 released meager sales results and slashed profit forecasts for the second time in months. The company cut 500 jobs, warning that more may come. Sorrell’s plan to disrupt the legacy agency model and seek revenge on WPP seemed to be on hold.

Sorrell, S4’s founder and executive chairman, blamed the weak results on a looming recession. “Have you looked at the world recently?” he asked, rhetorically, in an interview on Friday. “Basically, clients have got their hands in their pockets.”

But others found faults unique to S4. Nick Fox, head of the ad agency Atomic London, said Sorrell himself over-indexed on services that could be replaced by AI, like data analysis and automated ad-buying, meaning S4 will need to be “radically downsized.” According to a former associate, Sorrell attempted to rebuild his WPP empire at “breakneck speed,” without adequate care for the logistical and financial complications that have tripped him up recently. They asked not to be identified speaking publicly about Sorrell for fear of retribution.

On Tuesday, S&P lowered its credit rating for S4, citing slowing growth and “still-high” operating costs. S4 currently holds £370.8 million in debt, more than double its amount three years ago. The company said its net debt is “down significantly” and it expects to take more measures to reduce the amount next year.

Still, Julien Roch, a Barclays analyst, also downgraded S4 after its results, writing in a note that the company’s execution was “in tatters.” The analyst still sees “long-term value in the shares but there is no urgency to buy them now if you don’t own them,” the note read.

Sorrell acknowledged that execution was “not good” within his content division. “Our job is to improve the efficiency of the company,” he said, likening his next steps to Mark Zuckerberg’s “year of efficiency” at Meta Platforms Inc. — a euphemism for rampant layoffs, restructurings and cost-cutting. 

But Sorrell, 78, dismissed Barclays’s criticism of S4. “It’s a business that didn’t exist five years ago. It’s now a billion-pound business,” he said. “I don’t think that’s exactly ‘tatters.’” 

If S4 is judged differently than typical five-year-old enterprises, it’s because of Sorrell. He spent three decades transforming WPP into the world’s largest marketing, media and communications firm, often through brash, debt-fueled acquisitions and chummy ties with Fortune 100 executives. He became one of Britain’s most recognizable business tycoons, known for being pugnacious and demanding. He liked to tell WPP underlings that he was the same height as Napoleon. 

In 2018, after a period of sluggish growth at WPP, Sorrell came under investigation from the board for personal misconduct and use of company funds. Sorrell denied wrongdoing. He resigned from WPP in April of 2018, and started S4 a month later. “I chose to go. I went as a good leaver, and that’s that,” Sorrell said last week about his departure.

Sorrell positioned his new shop as a “disruptor” to WPP and other massive holding companies. S4 was a digital operation, not saddled with the legacy businesses of TV and print ads, nor the bloat of a big agency. It acquired more than 30 companies in its first four years, starting with the Dutch agency MediaMonks — a deal where Sorrell beat out WPP. S4 quickly expanded to more than 9,000 employees.

S4 hit a snag last year. External auditors refused to sign off on S4’s annual release, causing a delay the company attributed to “inadequate documentation” and poor understanding of accounting practices. Shares collapsed. In May of 2022, The Times of London reported that S4’s primary operation, MediaMonks, was rife with raucous partying, high staff turnover and sloppy bookkeeping. Sorrell called the newspaper’s report “highly inaccurate.” 

Sorrell said S4 “put a pause” on purchases last year and is now focused on “integrating what we’ve got.” 

S4 was particularly exposed to this year’s cutbacks in the tech industry. Tech clients like Google, Amazon and Meta account for 44% of S4’s revenue — more than twice the share the sector represents for WPP and other ad giants, according to 2022 financial figures. “It’s just burned them, because it’s the one category that’s most aggressively cutting costs,” said advertising analyst Brian Wieser.

S4’s main strategy is landing what it calls “whoppers” —  clients that spend an excess of £20 million ($24.3 million) a year. S4 reported that it ended 2022 with 10 whoppers. In a statement last week, S4 now claimed just eight. One big spender, the food giant Mondelez International Inc., shifted some of its marketing budget earlier this year from S4 to WPP. Sorrell said Mondelez “remains a major client.” 

He remains bullish on his overall roster. “This is a business with a list of clients that I think people would die for,” he said.

Jessica Pok, an analyst with Peel Hunt, wrote in a note last week that S4 suffered from a dearth of new customers, determining that growth was “more limited in the near term.” She downgraded the stock.Larger ad firms have dialed back growth forecasts this year as recovery since the pandemic has not be as “resilient as initially anticipated,” according to a report from Bloomberg Intelligence on Tuesday.

Sorrell laid out a turnaround plan. Profits were dragged down this year because of payouts to employees from earlier acquisitions, he said. Those outlays would end next year, allowing him to issue share buybacks and dividends. His content division — where operational Ebitda fell 73% on a like-for-like basis — often did “unbillable work” to foster relationships with clients, he said. “So we have to be much more rigorous in terms of our pricing.” He added that the firm’s investment in AI, including recent partnerships with Nvidia and Adobe, has had “a lot of inbound interest.”

Fox, the London agency chief, said Sorrell remained “the most driven executive” in the field. “I don’t believe he’s lost any of his swag or relevance,” he said. “He’s just having to change — and change it fast.” 

Sorrell is not prepared to change everything. He owns around 10% of S4’s primary shares and its only super-voting B share. Roch, the Barclays analyst, suggested removing the B share to improve governance and the stock outlook.

Sorrell had a succinct response to the proposal: “No.” 

(Updates with additional comments from Barclays in eighth paragraph.A previous version of this story corrected the Ebitda decline)

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