May 30, 2018 / 3:35 PM / in a year

Breakingviews - Sorrell’s new shell tests value of old contacts

Sir Martin Sorrell, Chairman and Chief Executive Officer of advertising company WPP, attends a conference at the Cannes Lions Festival in Cannes, France, June 23, 2017. REUTERS/Eric Gaillard - RC14CDD347A0

LONDON (Reuters Breakingviews) - Martin Sorrell’s exorbitant pay packages at WPP were supposedly justified by the CEO’s intimate knowledge of the advertising business and roster of high-level contacts. Now that the 73-year-old is starting from scratch again that value will be put to the test.

Sorrell left WPP just six weeks ago following a probe into alleged personal misconduct, which he denies. He’s put 40 million pounds into a new vehicle called S4 Capital, named after the four generations of his family. The business will soon have a London listing after agreeing a reverse takeover with 2 million pound cash shell Derriston, announced on Wednesday. S4 has raised another 11 million pounds from institutional investors, and has non-binding commitments for a further 150 million pounds of equity funding.

That will give Sorrell 200 million pounds of firepower – roughly the same as WPP’s net spend on acquisitions last year - to buy up small marketing, technology and media businesses. Indeed, S4’s focus on “technology, data and content” echoes the M&A section of the 15 billion pound group’s annual report, which Sorrell transformed from a cash shell called Wire and Plastic Products.

S4 is no WPP-killer, however. Even assuming it puts all the cash at its disposal to work, its equity value would be about 1 percent of the bigger group’s market capitalisation. And Sorrell’s 1.4 percent shareholding in WPP at the end of March - according to Thomson Reuters data - gives him a 215 million pound incentive not to take too much business away from the company he ran for more than three decades.

Nevertheless, the acquisition vehicle will test whether Sorrell’s bulging book of contacts can help find promising young businesses and sell their services to large corporations. In his last three years at WPP the company earned an average annual return on capital employed of 10 percent, using Berenberg estimates. That performance helped justify Sorrell’s controversial 70 million pound pay package for 2015.

Yet those returns could have been down to WPP’s scale and huge client base rather than the CEO’s personal input. Sorrell will need to use all his entrepreneurial flair – and shrug off the whiff of impropriety from the still-secret misconduct allegations – to prove that S4 is more than a shell.


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