Best of the Week: History repeating itself (how to lose money on agency rollups in 2008 and 2018)

[View web version]( BEST OF THE WEEK And another thing... Welcome to Best of the Week, after four days of empty public transport bliss - accompanied by the relentlessly upbeat soundtrack of 2 Many DJs, [as Heard on Radio Soulwax](, part 1. Admittedly, the downside of such bliss is that the lack of working public also tends to translate to a lack of people at their desks reading Mumbrella - and indeed a lack of people at their desks doing the sort of stuff that creates interesting things to write about. So quiet did things get that at one point on Wednesday afternoon we found ourselves discussing how to get on board the SBS ‘Slow TV’ train. Television fans might be aware that at 7.30 tomorrow night, SBS will dedicate three relaxing, commercial-free hours to footage of The Ghan train journey from Adelaide to Darwin. And hardcore TV fans will also be aware that the broadcaster will be accompanying it with a three-hour Facebook Live broadcast of The Feed’s Mark Humphries watching the show. So how about going the full Inception - and doing Mumbrella’s own Facebook Live of one of our team in turn watching Mark Humphries, watching SBS? You will be disappointed to know that I was voted down, but not before we got [a Dr Mumbo item]( out of it. As for the other stuff we talked about this week, it was mainly media investments - good and bad. Ways to lose money in 2017 As I may have previously mentioned, I am at times something of an introvert. So it suited me just fine as guests began to arrive (several hours earlier than anticipated) for New Year’s Eve at our place, to have the excuse to retreat to my study with my calculator to examine the ASX’s winners and losers of 2017. And while investors in the wider ASX index had a good 2017, those who backed the media and marketing industry mostly did not. Of the 14 stocks I examined, 11 went backwards in 2017, despite the wider index actually growing during the year. The [worst media and marketing performers on the ASX]( included media monitoring company Isentia, which saw its share price fall by more than half over the year, Seven West Media, which dropped by nearly a quarter, and of course Ten, where shareholders lost everything. The only big winner was Nine Entertainment Co, which grew its share price by 45%. Which suggests a few things. First, the pundits were wrong that the Government media ownership law reforms would create a share price boost. The lack of subsequent mergers and acquisitions activity meant that opportunistic investors stayed away. As a result, the share price performances were probably a more accurate picture of actual performance. As Seven later acknowledged at its end-of-year upfronts, it nearly lost its lead to Nine in the all-people demographic, while Nine won in 25-54 as usual. Plus the Amber Harrison scandal no doubt created a distraction. Yet the commercial performances of Nine and Seven were not as completely disparate as the differing share prices suggested. Yes, Nine had a year of improving audience share and therefore advertising revenues. But I suspect its big jump was also more to do with recovery from its big fall during 2016. And former ASX darling Isentia’s share price drop was about fundamentals - not only the well-documented King Content disaster, but also headwinds in its core media monitoring business. The ASX can be a tough place to have to update every quarter when things are going wrong or sentiment turns against you. Ways to lose money in 2018 As Mark Twain (probably never) said, history does not repeat itself - but it rhymes. So it seems fitting that we’ve just hit the 10-year anniversary of the day that Photon Group, also briefly a darling of the ASX, peaked. The idea behind Photon was a relatively simple one to sell to investors: put together a bunch of communications agencies and technology providers into a group and somehow the sum of the whole would be greater. And for three years, investors bought the idea, with the share price travelling ever higher. The madness hit its zenith in February 2008, when Photon bought Naked Communications for $36m, putting it on the global map. Soon though, it all began to unravel. While some agency owners had agreed to sell mainly in exchange for shares in the group rather than cash, others had negotiated hefty earnout deals based on multiples of future years’ profits. And when they started to outperform those numbers, the group didn’t have the money to pay them, and the house of cards began to collapse. For those early into the deal, the outcome was okay. They got the initial purchase price, and even the first year or two of earnout. They merely missed the final payment. As one founder told me later: “It was okay. I got the cake, and I got the icing, but I didn’t get the cherry.” But for others, the outcome was more tragic. In some cases, founders had accepted the whole deal in shares. When the value of those shares plummeted, they realised they had given away the agencies that had spent years building for virtually nothing. And then there were those in the middle - the likes of BWM - who got to buy back their agency for almost nothing when the group couldn’t pay them what was owed. These days, what remains of Photon Group is Enero, which funnily enough proved to be a modest winner on the ASX last year. Which brings me to AJF Partnership’s forthcoming ASX adventure. [The agency has thrown its lot in with the clunkily named Trimantium GrowthOps](. AJF is in many ways in an enviable position. With the snapping up of The Monkeys and The Works last year, there are very few large independent agencies left on the market. Particularly not good ones like AJF. It’s a bit like the demand for the last house on the street in a hot real estate market. And I’m sure the owners want to make sure they get as good a price as possible for their agency. If you sell it to an existing group, you’ll probably only be offered five or six times the last year’s profits. But then come some financial whizzes - in this case Trimantium Capital. Instead, the model they propose is to go to ASX investors with a list of eight agencies and tech providers who are willing to sell. If $70m can be raised, the float goes ahead, and the owners get bought out with a mixture of cash and shares (which they can’t sell straight away) in the new organisation. If all goes well, and the shares soar, the founders will one day walk away with more than they’d have got in a more traditional sale. But if the share price tanks, then the picture may be quite different. It’s also not dissimilar to a model my colleague Steve Jones investigated last year in his piece ‘[A roller coaster of hype: Can the new regime exorcise the ‘bullshit’ past of The Marketing Group?](’ I suspect many of those who sold to TMG regret it now. The most obvious question for any such rollup is whether you get real inter-company efficiencies when you put them together - particularly when they’ve never collaborated before, as they haven’t with the Trimantium GrowthOps plan. Certainly, Photon Group never demonstrated much in the way of synergies. And over the years, I’m not sure I’ve seen the other big local example, STW Group - now WPP AUNZ - do an amazing job at cross selling between agencies. Another factor that will no doubt influence investor sentiment is what those who put in money will get for their investment. It seems the people stitching together the deal will get rather a large slice of the company considering they didn’t have much of a hand in creating the businesses which will deliver the group’s future profits. Meanwhile, investors are being told not to even expect dividends. It all feels like financial engineering, not start-up entrepreneurialism. But this all could prove to be academic. The float was due to happen in December, and it appears to have been postponed a couple of times now. I wouldn’t be surprised if it doesn’t happen at all. As a side issue, as a reader, I’ve found myself become increasingly cynical about those articles which end with the phrase “Journalist X travelled as a guest of Brand Y”. I became thoroughly tired of reading flight reviews in the likes of The Sydney Morning Herald in which a journalist tries to justify their free upgrade. And I must admit, over the years, Mumbrella accepted a couple of invitations from tech companies to take a journo to one of their conferences in the US. Coverage was never conditional, but inevitably the journo felt obliged to justify their time, so filed something. And equally inevitably, I cringed at the emptiness of the piece, accompanied by the “Journalist X travelled as a guest of Brand Y” disclaimer. So I called a halt to us accepting such invitations. I figured the cost of paying our own way to the events that matter enough to be there was less than the hit on credibility of going on someone else’s dime. Since then, I’ve never felt we’ve missed out editorially as a result, even when the junkets now go to our rivals instead. The reason I mention this is because one thing that has surprised me about the Trimantium GrowthOps float is how easy a ride it has been given so far in the mainstream financial press, particularly The Australian Financial Review. I think it’s a tad unfortunate that the AFR archive shows that back in 2016, the man behind Trimantium took the AFR’s Melbourne technology writer on a junket to San Francisco which resulted in a flattering profile piece labelling him “Melbourne’s best networker”. (I’ve chosen not to embarrass the journo by naming her here, as I’ve no idea whether she was told to go on the assignment or pushed for it.) Admittedly, it’s an article that when you read it carefully enough, the reality doesn’t live up to the hype. When the study tour group arrived at the Facebook HQ, they didn’t get beyond the giftshop. But nonetheless, perceptions of a quid pro quo of the profile do not look great in retrospect. Still, back in the day, the AFR was also Photon’s favourite outlet when it announced each new over-priced agency acquisition. So perhaps history does rhyme. And my weekend is also repeating itself. Time soon to turn on the telly for The Ashes. As ever, I welcome your emails to tim@mumbrella.com.au. And should you have a story for us, my colleague Zoe Samios - zoe@mumbrella.com.au is on the newsdesk today and tomorrow. Have a splendid weekend. Toodlepip... Tim Burrowes Content director - Mumbrella Mumbrella | 46-48 Balfour Street Chippendale NSW 2008 Australia [Unsubscribe](| [Manage Subscriptions]( [Facebook]( [LinkedIn]( [Twitter](