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Merger Monday strikes again after bankers have been busy finalizing the details for many deals over the past weekend.

Omnicom Group (NYSE:OMC), the leading global advertising and marketing communications company, announced a merger of equals with French-based Publicis Group. While the deal creates the largest advertising and marketing agency worldwide, investors have their doubts.

The complications of this mega-merger, potential regulatory hurdles and a complicated integration process make investors a bit hesitant towards the deal. This is despite the high synergy estimates. Therefore I completely understand the sell-off, especially in Omnicom's shares whose activities are much bigger compared to Publicis. Yet, investors of Omnicom will only receive a 50% share in the newly combined firm.

The sheer size, difficult history of Anglo-French mergers, dilution for Omnicom's shareholders and potential disruption with customers are very realistic risks, which in my eyes do not justify $500 million in annual synergies.

The Deal

Omnicom announced that it has entered into an agreement to create a merger of equals with Publicis Group. Under terms of the deal, shareholders in Publicis stand to receive 1.00 new share of Publicis Omnicom Group and a special dividend of 1.00 Euro. Omnicom's shareholders will receive 0.813 newly issued share in the combination and a special dividend of $2.00 per share.

The combination will combine iconic agency brands, offering its clients a more global reach with the best talent. Shareholders in both firms will hold a 50% stake in the equity of the new combination which will be listed on the NYSE and on Euronext Paris.

The combination will employ 130,000 workers which will help its global clients to build and grow the business in a rapidly changing communication landscape. Agencies owned by the combination include names like Saatchi & Saatchi, Leo Burnett, Interbrand, Proximity and Rosetta, among others.

Current CEOs Wren and Levy commented on the rationale behind the deal, "For many years, we have had great respect for one another as well as for the companies we each lead. This respect has grown in the past few months as we have worked to make this combination a reality. We look forward to co-leading the combined company and are excited about what our people can achieve together for our clients and our shareholders."

Current CEOs Mr. Wren from Omnicom, and Mr. Levy from Publicis will lead the combination in the coming 30 months as the firms will start the integration process. After this period, Mr. Wren will become CEO, while each company will provide seven directors for the board.

The combined entity generates pro-forma revenues of $22.7 billion per annum, being valued at $35.1 billion before the deal was announced. According to the companies, the deal will create value for shareholders by accelerating revenue growth and creating operating synergies. These incremental synergies are estimated at $500 million per annum.

The new entity will be based in the Netherlands, while the head offices continue to be located in New York and Paris. The deal is subject to shareholder and numerous regulatory approvals. The deal is expected to close as early as the fourth quarter of this year, or the first quarter of 2014.

Valuation

Omnicom ended its second quarter of its fiscal 2013 with $1.41 billion in cash, equivalents and short term investments. The company operates with $4.05 billion in total debt, for a net debt position of $2.64 billion.

Revenues for the first six months of the year came in at $7.04 billion, up 2.4% on the year before. Net income rose by 1.5% to $495 million. Full year revenues could come in around $14.5 billion, while earnings could come in around $1 billion.

Shares ended Monday's trading session unchanged, trading at $65 per share. This values the firm's equity around $17 billion. As such operating assets of the firm are valued at 1.2 times annual revenues and 17 times annual earnings.

Omnicom currently pays a quarterly dividend of $0.40 per share, for an annual dividend yield of 2.5%.

Some Historical Perspective

Over the past decade shares of Omnicom have almost doubled. Between 2003 and 2007, shares have traded in a $35-$55 trading range. Shares fell to levels in their low twenties amidst the financial crisis but have steadily recovered ever since.

Shares steadily gained as Omnicom boosted its dividends, and its operating performance, currently exchanging hands at $64 per share. Shares set fresh all time highs at $70.50 per share on Monday morning when investors were enthusiastically reading the news headlines.

Between 2009 and 2012, Omnicom has increased its annual revenues by a cumulative 20% towards $14.2 billion. Net earnings rose by a quarter to $1.0 billion. At the same time, Omnicom retired almost 13% of its shares outstanding over the time period.

Investment Thesis

Shareholders in both Omnicom and Publicis initially reacted with great enthusiasm to the news, most likely on the back of annual synergy estimates of $500 million. Yet shares have sold off quite aggressively, retracing some 10% from Monday's peak.

The initial reaction towards the upside is understandable as annual synergies could total $500 million. Applying a conservative ten times multiple to that, the combined value of the firm's should have increased by some $5 billion. In comparison, based on Friday's closing prices, the combined market capitalization of the firms was about $35 billion, suggesting some 15% upside for shares in Omnicom and Publicis.

Besides achieving cost synergies, the company should be able to obtain better advertisement rates for TV, internet and print as the global advertising market is recovering. On top of that, the deal would be good to serve global customers. In recent years, technology names like Google (GOOG) and Facebook (FB) have come up with disruptive technologies making them worthy competitors, especially given their ability to change rapidly, their huge databases and strong balance sheets.

Yet some skepticism arose about the credibility of the synergies without laying off workers. Also a mega-deal like this one does not close overnight. While Publicis' CEO Levy said he does not expect resistance from the French government, the deal might still face some scrutiny, possibly from regulators. The integration of even more advertisement agencies might actually scare off customers as well. For instance, Coca Cola (NYSE:KO) is now a large customer of Publicis while PepsiCo (NYSE:PEP) hires Omnicom for its advertising.

As the deal will need regulatory review in 45 countries, some asset disposal seem inevitable. Furthermore Omnicom's shareholders will hold just a 50% stake in the newly combined company. While Omnicom's earnings of $1.0 billion for the past yet were equivalent to Publicis' Euro 737 million in profits, its annual revenues of $14.2 billion are roughly two thirds higher than its French counterpart which generated Euro 6.7 billion in revenues.

I currently hold no position in shares of Omnicom. The latest news flow and the complications of the mega-deal make me very hesitant to invest despite the synergy estimates.

Source: Merger Monday: Omnicom And Publicis Group Merger Fails To Impress Shareholders