September 24, 2021

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Sorrell’s S4 Capital doubles – but growth now will be harder

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Sir Martin Sorrell’s S4 Capital – owner of Media.Monks, Mighty Hive and Firetree Marketing among a rapidly expanding list – is still growing rapidly with like-for-like gross profit (net revenue) up 49% so far in 2021 (66% in the second quarter.)

This, S4’s preferred measure, is now forecast at 35-40% for the year (comparatives with the Covid-hit second quarter of 2020 qre obviously flattering.)

Billings were £547.5 million and revenue £279.3 million, more or less doubling over 2020. Headcount increased from 5,751 from 2,644 a year ealier. Losses, though, widened to £16.3m, chiefly employment costs.

S4’s shares fell 7% in early trading today, suggesting the market expected more.

This is a pinch point for S4, now three years old. It has gone from nothing to a valuation of $4bn but further growth, at least at that rate, looks more problematical. S4, which has around £400m to play with, pays for its merged companies half in cash, half shares. The founders of Media.Monks and Firetree are significant shareholders along with Sorrell. Clearly you can only carve up 100 so many ways although Sorrell has the equivalent of a golden share which guarantees him control.

This, in itself, is an obstacle to an eventual full listing on the FTSE100 (and access to more investment) although the rules around such holdings are being reviewed.

S4 also has to demonstrate that it can perform for major non-tech clients, notably BMW which it has won in Europe with Germany’s Looping Group. And the ad holding companies, including Sorrell’s former creation WPP, are getting their digital act together, thereby increasing competition.

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Sorrell (above) says: “After only three years, on our third birthday as a listed company and with a market capitalisation of around six and a half billion dollars, which is well in to the top 125 FTSE companies, we are now in a position to build even stronger value-adding relationships with tech, healthcare, financial and FMCG clients amongst others.

“And with a strong and liquid balance sheet and significant combination firepower we are in a great financial place to expand through further combinations, which will add to our data, content, digital media and, potentially in the future, technology services capabilities. The second half of 2021 and the prospects for 2022 look very good primarily driven by the fiscal and monetary stimulus, as well as the years beyond driven by digital transformation.”

All looks pretty good then but the share price fall will be a concern and, at three years old with lots of clients, S4 will, sooner or later, have to face defensive reviews as well as integrate all these companies.

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