The chance of WPP being broken up has 'dramatically increased' - Goldman, UBS, and more react to Sir Martin Sorrell leaving

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The chance of WPP being broken up has 'dramatically increased' - Goldman, UBS, and more react to Sir Martin Sorrell leaving

Sir Martin Sorrell Chief Executive WPP during Advertising Week Europe, Picadilly, on March 25, 2015 in London, England. (Photo by k)

John Phillips/Getty Images for Advertising Week

Sir Martin Sorrell Chief Executive WPP during Advertising Week Europe, Piccadilly, on March 25, 2015 in London, England.

LONDON - Sir Martin Sorrell announced on Saturday that he is leaving advertising giant WPP after 33 years as CEO.

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His exit comes as something of a surprise - investors had no reason to expect his exit as recently as three weeks ago. But it was reported at the start of the month that Sorrell was subject to an internal investigation into alleged misconduct and misuse of assets.

Sorrell denied all the allegations against him but said in a letter to staff on Saturday that the "current disruption" was "putting too much unnecessary pressure on the business."

WPP chairman Roberto Quarta will act as interim CEO until a replacement is found. Meanwhile, Mark Read, CEO of WPP's Wunderman unit, and Andrew Scott, European COO, have been announced joint-COOs of WPP. Liberum's media analyst Ian Whittaker says this "will heighten speculation that they will be the top contenders for the slot."

Whittaker isn't the only analyst reacting to Sorrell's departure. Others are touting a potential breakup of WPP, the sell-off of minority investments, and even possible disruption to bids for key accounts.

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Here's what major analysts are saying:

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BARCLAYS: 'Operating management distracted during the expected Mediapalooza 2'

BARCLAYS: 'Operating management distracted during the expected Mediapalooza 2'

Barclays European media analyst Julien Roch and team: "Potential negatives resulting from change in CEO: We see three potential negatives: (1) operating management being distracted during the expected Mediapalooza 2 [lots of major accounts being re-tendered], (2) new CEO could restructure WPP more radically leading to high restructuring costs in the short-term, which would take WPP above its gearing target and (3) European media shares usually underperform around management changes.

"Potential positives resulting from change in CEO: In our view, the main potential positive outcome from a change in management would be a more rapid and radical restructuring to address the industry’s current woes."

GOLDMAN SACHS: 'A new CEO could look to more significantly restructure the group'

GOLDMAN SACHS: 'A new CEO could look to more significantly restructure the group'

Goldman analyst Lisa Yang and team: "We view the timing of Mr Sorrell’s departure as a surprise given the relative lack of clarity over the succession planning process.

"We see a potential risk of disruption to WPP’s operations in the near-term given Mr Sorrell’s close involvement in the business for the past 33 years, especially at a critical time when WPP is renegotiating its relationship with its largest client Ford (4% of net sales) and defending a number of accounts including Mars, Jaguar, HSBC, Shell etc (representing 0.5% of net sales at risk).

"While we do not take a view on the likelihood of any outcome, we believe a new CEO could consider exploring options for underperforming assets such as a disposal downsizing, based on press reports (MediaPost). As we have previously discussed, we note that Kantar (15% of group net sales and PBIT) has been a notable drag on organic growth in recent years.

"We believe a new CEO could look to more significantly restructure the group, similar to Publicis’ reorganization since 2015 into four solution hubs."

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UBS: 'Uncertainty is likely to linger until a new CEO is appointed'

UBS: 'Uncertainty is likely to linger until a new CEO is appointed'

Analyst Richard Eary and team: "Sir Martin's resignation raises 2 questions: 1) will it impact earnings; and, 2) will new a CEO restructure the business. Uncertainty is likely to linger until a new CEO is appointed and a new strategy outlined to the market.

"Given agencies are run at arm's length, we don’t foresee any near-term impact of Sir Martin's departure however we are uncertain how important his relationships with CMOs was in winning and retaining clients.

"We believe a new CEO is likely to review the strategy and could: 1) consider the sale of
Kantar which continues to underperform... 2) Divest balance sheet investments (such as Globant, AppNexus, ComScore, Vice) which have a £2.2bn valuation and contribute <£100m in associate income; and 3) simplify the business which in turn should drive cost out and ready the business for structural headwinds."

LIBERUM: 'Sir Martin could arguably be called the glue that bound much of WPP together'

LIBERUM: 'Sir Martin could arguably be called the glue that bound much of WPP together'

Analyst Ian Whittaker and team: "Sir Martin could arguably be called the glue that bound much of WPP together. With his departure, we think the chances of significant chunks of the business being sold off have dramatically increased.

"We think there is a significant possibility that WPP will now sell its Data Investment i.e. Market Research unit, and possibly PR, but that the rest of the group will be kept. This should drive a closing of the gap between the valuations and performance of WPP and the other Agencies.

"One aspect of the resignation that has gained attention is that Sir Martin has not signed a non-compete clause. We would not read too much into this given Sir Martin's age but, more importantly, that WPP is his creation and he would not want to do anything that would be seen as damaging the company. Sir Martin still owns c.2% of the shares."

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