Sorrell reveals 'firepower' for more S4 mergers

Sir Martin Sorrell’s S4 Capital has half a billion pounds in “firepower” to chase more company mergers, the former WPP chief’s digital marketing group has announced alongside its first-quarter earnings.

S4, the holding company behind MediaMonks and MightyHive, reported a 71% year-on-year increase in organic revenue (reported as “gross profit”) to £104m ($144m) for the first three months of 2021. This is a 33% increase on a like-for-like basis.

The two-year-old business, formed by executive chairman Sorrell after his acrimonious exit from WPP in 2018, is now targeting “even stronger” growth this year as the global economy bounces back from the Covid-19 pandemic.

S4 is targeting 30% organic revenue growth this year, up from a previous target of 25%. In 2020 the business posted 19.4% growth in organic revenue to £295m.

The company attributed its growth to two “whopper” account wins that began to have an impact on its balance sheet in March. S4 did not specify today which brands these were, but last year MightyHive won T-Mobile’s in-house digital media account and MediaMonks picked up BMW/Mini’s pan-European account.

Earlier this year Sorrell said S4 had five more “whoppers” that were “secure or in sight”. The company has a “20 squared” objective, which is to have 20 clients that each generate revenues of over $20m a year.

It is also keen to explore further “merger opportunities”, the company announced today, especially in "high-growth functional areas of the content and data and digital marketing practices". Sorrell has previously explained how S4 takeover targets should be regarded as “mergers” rather than “acquisitions”.

“We are prepared to leverage the company to around two times EBITDA and are preparing a bond issue to lock in our long-term debt capacity at attractive rates,” the company statement said.

“This, together with cash in hand and the 50:50 cash:equity merger structure we commonly use, will give us £500m of merger transaction firepower.”

Sorrell also relayed S4’s belief that offices will be occupied on average for three days a week, with more employees working from home and from longer distances. The pandemic has demonstrated that a more flexible, “hybrid” approach may be more effective, he added.

He explained: “This is particularly the case as we are probably at the beginning of further significant technological change, which will make distance working and living more effective. Office spaces will also be different. We will continue to consolidate our two practices in each city into one location, but the pattern of office layout may vary between spaces for clients, spaces for our people to work together and for our people to have privacy.”

S4 is “extremely optimistic” about its growth prospects this year and in 2022, Sorrell added, given the “huge global fiscal and monetary stimulus” that countries such as the US and UK have implemented in response to the pandemic.

However, he warned: “The chickens may well come home to roost in 2023, given the debt burden that most countries will have and the tax increases that will have to be implemented. But, digital marketing expenditure remains robust, even in a recession, as our results last year demonstrate, given its secular growth trend.”