Back in the days when Enero was called Photon Group, it was Australia’s most talked about marketing services group. These days it is much smaller, and more conventionally run. But the stock market appears to value the company at less than the sum of its parts – raising the question of its long-term future. Robin Hicks reports in a feature that first appeared in Encore.
The bosses of what was once Australia’s largest marketing group, Enero, must be thoroughly fed up with being asked if is to be sold, broken up or has a miraculous recovery plan up its sleeve.
The company once known as Photon, and once worth around $2bn, has just released financial figures that do not make those questions go away.
An EBITDA loss of $76m for the first half of the financial year and operating profit of just $2.3m reflects not just the legacy of the company, but also the challenges its companies face within a tough market. The fact that continuing revenues were down to $135m from $175m in the same period a year before underlines this.
Enero’s most prized assets, Naked Communications – the London-based strategy agency Photon surprised the marketing world by acquiring in 2008 – and BMF – one of Australia’s best creative agencies – have been struggling, and are blamed for a gloomy balance sheet. Enero’s market capitalisation on the ASX remains stuck at $30m – well below the $36.7m the company paid for Naked in 2008, which was just the price ahead of further earnout payments. And the company paid $21.8m in cash, plus shares, for BMF in 2007.
With a share price of 35 cents (updated: up to 38.5c since the article went to press), the value of Enero is less than half what it was 12 months ago – and a distant memory from its peak. Shares were almost $7 in 2007 – just before the company crumbled in the wake of the global financial crisis and a questionable growth-through-acquisition strategy.
With assets that include research agencies The Leading Edge and Jigsaw, PR shops Hotwire, Frank and OPR, brand strategy firm Corporate Edge and digital firm Dark Blue Sea still in its stable, $30m looks a cheap buy – and well under what it would be worth if broken up.
Industry watchers give the company no more than two years before the Enero story somehow comes to an end, one predicting it will not even last until the end of this financial year, in five months’ time.
“Enero received a stay of execution when it got rid of its debt [in November 2011, when its field marketing and retail businesses were sold for $146.5m],” says a former boss of one of Enero’s top agencies, who remembers when Photon staff conferences filled the Sydney Convention Centre with 2,500 people.
“With revenue falling the way it is, I’d be astonished if Enero existed in two years’ time,” he says. “It’s running on borrowed time. How low can a share price go?”
In the sort of corporate collapse that would make for a best-selling book, Photon shrunk from having 50 businesses at the tail end of a Pac-Man like acquisition spree in 2008, to the 11 Enero has today. It has 931 staff in offices in Australia, the UK, the US and, if the plan goes ahead, Brazil some time this year.
Enero boss Matthew Melhuish
Widely respected ad man Matthew Melhuish, the M in BMF, took the helm just over a year ago from CEO Jeremy Philips, the man who in 18 months rescued Photon from crippling debt.
Melhuish insists there are no plans for a break up. “The company has been through considerable upheaval over the past few years,” says Melhuish. “We were a disparate group of companies carrying a significant debt, and we are now a much smaller debt-free business in rebuilding phase.”
Melhuish’s plan, announced to the market recently, is to find ways for Enero to work better as a group, and get its assets dancing. For a holding company, this means basic back-end stuff such as sharing IT systems and HR – but it’s a strategy that has not existed before. And it’s already starting to bear results, says Graham Goodkind, the chairman of Frank PR, which – with four offices in Sydney, London, Manchester and New York – is probably worth more than $30m on its own.
“From a group perspective, the company is the most stable it has been in a long time. The CEOs of each of the key businesses are now working as a group leadership team, looking at ways to combine the strengths of Enero’s individual businesses,” says Goodkind.
The trouble is, there hasn’t been much good news from two of Enero’s key assets. BMF’s loss of a retained account with CommBank was worth three per cent of Enero’s net revenues, and “difficult conditions” for Naked (struggling in Europe) have dragged the group down. What doesn’t help is that Naked’s unusual original business model – persuading clients to pay for smart strategic thinking – is a tough sell.
Things might be looking different had BMF won the pitch for Bank of Queensland in December. Ironically enough, the account went to BWM, which bought back its independence from Enero in August, a little over a year after cratering Photon by losing Telstra.
With Enero’s cash flow limitations and few of its top operating assets on fire, there is “nowhere to go for oxygen”, says a former senior member of the Photon Group familiar with Enero.
“BMF and Naked are struggling, and the others are too small to make a big difference,” he says. “If there’s any drop in the performance of Enero’s agencies, the company becomes squeezed very fast on cash flow. Yes, Enero has a bit of cash on hand. But, month by month, that is being eaten away as its assets continue to perform weakly.”
Enero’s underlying financials are manifest in the results, and they show that the margin for error inside the business is nil, he says.
Enero is now the size of a top 10 agency in the UK, but is operating on lower margins and larger overheads, says the source. Although slimmed down from their early excesses (million-dollar staff party on Cockatoo Island, anyone?), the holding company costs are still too heavy relative to the size of the underlying assets to make it a seriously competitive business, he says.
Another problem is the lack of diversity in the business that other holding companies have, says another source, formerly at an Enero agency. “Enero does not contain enough synergistic businesses, just replicas,” he says, pointing to Hotwire, CPR and Frank – all PR agencies.
“You could argue that there is not enough difference in the business to make it much stronger.”
Enero has been left with “a residue of companies” after being forced to sell assets to reduce its debt mountain, leaving the company “too ad heavy”, says another former Enero executive, who is not convinced by the company’s positioning as a ‘digitally centered global marketing services group’.
“BMF does digital campaigns, but they’re not in the same league as an R/GA or a Razorfish. If Enero had the resources, it would build in that area. But good digital firms, particularly in Australia, are scarce and expensive,” he says.
Another source familiar with the company says: “BMF seriously needs to gain altitude. BMF has spent too much time blaming it’s clients for it’s troubles. One of the big issues for Enero is to coach the BMF management to work over their problems rather than wallow in them,” he says. Meanwhile, the relationship between Naked’s unconventional co-founder and chairman Jon Wilkins – who spent time based in Australia after the sale but is now back in London – and Enero is strained, claims another former senior Enero staffer.
“There is no love lost between them, and they are becoming less and less comfortable in the same room.”
Cheap though Enero currently is, does anyone want to buy it?
“It’s hard to see why anyone would buy Enero as a whole. And if they did, and sold bits of it off, you’d have to incentivize management to stick around – which would be expensive,” says a former Enero source.
The bosses of the obvious two potential acquirers in Australia, STW Group and Clemenger Group, are showing little public interest. STW Group CEO Michael Connaghan says he knows little about Enero’s situation, and declined to comment.
Clemenger Group’s executive chairman Robert Morgan says that while Clemenger had “watched” Photon some years ago, buying it now was “not an option”. “People have been whispering about Photon for a long time, but I don’t think anyone really knows what’s going to happen,” he says.
“I respect Matt [Melhuish] hugely. The company has some good assets and is an attractive target. But buying is not an option for us,” Morgan adds.
So what about the Asian networks, Dentsu and Cheil? Michael Kim, global COO of Korea’s Cheil, says that while his network bought two agencies in 2012 (in China and the US), Enero was “not a consideration” for the group.
“Australia is as important as any other market for us. We will continue to look for the ideal strategic partner, with a shared vision for growth in the country,” he says.
Japan’s Dentsu is set to expand once a deal goes through with Aegis Media, owner of Australia’s largest media-buying point Mitchells, and recently struck a non-equity alliance with Sydney start-up Archibald/Williams. At the right price, BMF in particular would be a good fit. But Dentsu did not comment.
Melhuish says that any discussion between interested parties would be confidential, adding that the group is “the right size as it is”.
“We are small enough to be nimble and entrepreneurial, but large enough to have scale. My focus is on improving the performance of each company, getting the culture right and achieving the strategic goals of the group,” he says.
Few doubt that there is enough talent within the business for the company to fight back, as it has done before. It just needs a bit of good news. “The rebuilding takes time,” says Melhuish. “But we are now getting the foundations right.”
This story first appeared in the weekly edition of Encore available for iPad and Android tablets. Visit encore.com.au for a preview of the app or click below to download.