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Omnicom Group Inc. (NYSE:OMC)

July 31, 2013 7:00 am ET

Executives

Maurice Lévy - Chairman of Management Board, Chief Executive Officer, Chairman of Publicis Conseil SA (France), Chairman of the Board of Mlms SA (France) and Chief Executive Officer of Publicis Conseil SA (France)

John D. Wren - Chief Executive Officer, President and Director

Randall J. Weisenburger - Chief Financial Officer and Executive Vice President

Jean-Michel Étienne - Chief Financial Officer, Executive Vice President of Fnance and Member of the Management Board

Analysts

Filippo Pietro Lo Franco - JP Morgan Chase & Co, Research Division

Yohann Terry - Exane BNP Paribas, Research Division

Filippo Pietro Lo Franco - JP Morgan Chase & Co, Research Division

Okay. I think that we can start now. So first of all, welcome to everyone. My name is Filippo Lo Franco. I have the honor of leading the equity media research team here in London and covering Publicis. And in the future, as the co-coverage is equal, I will be covering with my friend Alexia Quadrani in the United States.

So welcome, again, everyone. Particularly, I would like to welcome Publicis and Omnicom management today.

So from the Publicis management, we have here Maurice Lévy, Chairman and CEO. From Omnicom, we have John Wren, CEO. We also have CFOs. We have Randall Weisenburger, the CFO of Omnicom; and we have Jean-Michel Étienne, who is the CFO of Publicis.

And I would like just to announce that this presentation and this broadcast is at listening mode only. So if you have any questions, you can send me an email. So people who know my email know what it is, but just in case, it's filippo.p.lofranco@jpmorgan. And I think that we can start immediately with one general question. Actually, it's going to be a Q&A-only session because you already know the slides [ph].

Question-and-Answer Session

Filippo Pietro Lo Franco - JP Morgan Chase & Co, Research Division

So my first idea, because when the news came on Saturday, I mean, I said, "Oh, finally. I have a nice weekend for myself." And then I start to see the Bloomberg headline and say, "Oh, I don't believe this." Then after a while, I started to understand as it goes through. So how -- I mean, how did the idea come up? I'm really curious [indiscernible]

Maurice Lévy

I'm responsible.

John D. Wren

It was your house.

Maurice Lévy

First of all, John and myself, we know each other for a long while, and I always had a great admiration for Omnicom, for John, for what he has achieved. And in our industry, where there is a fierce competition, there are 2 kinds of people: the people who are competing on a fair basis and who are always staying gentlemen, winning or losing. And there is another kind of people I will not mention. Okay, I will not mention. You know them. And with John, we always had a very good relationship, and we were meeting socially. And one day, in Davos, I said, "Why don't you stop by and we'll have a cup of coffee or lunch, and we know better each other." And he called me and say, "Okay. I will be in Paris. Can we have a cup of coffee?" And we had that cup of coffee. I paid for. And so you see, it's not really equal. And we had that conversation very nicely. He was visiting our offices. And then at that point in time, we were visiting the terrace and he was seeing the view and he said something which is absolutely true, which is priceless. And I don't know why I reacted by saying, "It can be yours." But honestly, I had no idea what I was talking about. And he returned the invitation like socially, you give an invitation and you return the invitation. We sat down in New York, and we started to play with the ideas that we -- what we could do together. John?

John D. Wren

Exactly. And each meeting result -- ended with the desire to have another meeting. So we traded cities, not every weekend, every other and just tackled questions that might stand in the way of us coming together. And both are amazing. I think we are able -- the planets and stars are aligned, and we are able to come to an agreement on just about, or not just about, every single point: so how we could do this, what it would mean in satisfying the desires of our clients and offering opportunities to our people. And we concluded that we could. So we've decided that we would engage bankers and then lawyers who naturally tried to get in the way. But every time that happen, it actually -- I think every difficulty we had in the conversations and the way we were able to resolve them only strengthened the bond and proved that we could co-exist, especially through a period of integration. We're also both big dispersed company. And we are able -- the most amazing bit, other than the fact that we were able to come to agreement, was that we were able to actually keep it to -- keep it quiet because we kept a group of people that we engaged from an employee point of view to very tight groups, and here we are. And again, now I couldn't view this -- this would not have been possible with any of the other groups that are in our industry...

Maurice Lévy

And the same from me.

John D. Wren

For a lot of reasons, but I've great faith that Maurice and I will work very successfully through this and put together something that will define the legacy of both of us in years to come.

Filippo Pietro Lo Franco - JP Morgan Chase & Co, Research Division

That's great. So I think it's up to you guys for questions.

Unknown Attendee

Can I ask -- you said you probably -- when you first sat down, you went through the list of potential issues. Can you give us a couple of those, the biggest issues that you saw potentially and how you managed to overcome any concerns you have with respect to those issues?

John D. Wren

I think we started with the hottest, which was Maurice has been CEO since 1987, and I've been CEO since 1997. And when you've been around that long and you have that much experience with the clients and not much experience in the way that you built your company, you are used to taking counsel from very, very smart people, but you know you always hold the deciding vote. So we had to work through, role-playing in many ways, a number of issues and to make certain that we commit to each other in a very serious way because if we commit to each other and if sometimes on issues I win, sometimes he win, but we keep that within -- between the 2 of us, our organizations will function as they function when we're just simply the sole leader of it. And so we designed a process which will work individually -- for us collectively, and we believe our organizations. And I said that's probably what we dealt with first because we already had great admiration and respect for the assets each held, and then it went from there.

Maurice Lévy

Yes, we addressed the issue of governance. And the first issue that we had to address, obviously, was strategically, is this making sense or not, because we had no intention whatsoever to just do a deal to become bigger.

John D. Wren

Yes.

Maurice Lévy

This make no sense for us, and it has never been our objective. It is the result. We grow, we are bigger. But the objective was not to do a deal to be bigger. The objective is to drive the key issues of the future of the industry. So strategically, we believe we had something which was extremely right, then we look at the governance and we look at the other half of this issue, which is conflict. And I know that there is some people who are flagging conflict as one of the issue that will create enormous problem. Conflict is something that, in our industry, we are used to deal with in the '70s, and the holding company had been created in order to solve the problem promptly. So as I'm a little bit shy, I will not cover what we do at Publicis, and as we are modest, we'll not speak about what we do at Omnicom. We will cover, for example, WPP. I don't know if you have heard about WPP. It is a holding company in the U.K. They are handling 2 -- I will take just one example. They're handling an account which is called Colgate-Palmolive, toothpaste and a few other things; Unilever, toothpaste and a few other things; Procter & Gamble, beauty, cosmetics and a few other things; and a large piece of Estée Lauder; a large piece of something which is called Kimberly-Clark. And Kimberly-Clark, Unilever and P&G would never accept to coexist within one single holding company only 10 years ago. And I can go on. I'm speaking about this. We can speak about automotive. We can speak about other aspects. There is a lot of areas where conflict coexists, and this is part of our daily life. Some conflicts are more difficult than some others because beyond the rationale and beyond the fact that you are putting some clear firewalls and some strict confidentiality system, there is some emotional aspect. And we are not dismissing the emotional aspect. We know we are in that business in strong time, and we know our clients and we know that some clients react negatively to some aspect. So we discuss that. We look at the possibility. And we do believe that we will be able to offer solution to all our clients, all our clients. That is clear. Then we look at something else, which obviously the people, for the people so full of opportunities that we don't need to insist too much. And we look at when you put the assets together and beyond the strategic aspect, what this is going to do for our clients. So Omnicom portfolio of clients and the assets of Publicis, Publicis portfolio of clients and the assets of Omnicom. Whatever we have said to the market, you add 100 basis point minimum of organic growth. So you take our combined numbers, you take our combined indication for the future and you add 100 basis point because this is what will happen. We can elaborate on this, but I think we'll give the opportunity to some other people to put questions. And probably, we will be able to elaborate based on the question they will be putting.

Unknown Attendee

[indiscernible] sort of questions so you won't repeat. [indiscernible] respective assets [indiscernible]

John D. Wren

Sure. Yes, I think when you lay our portfolio and Publicis' portfolio over each other, what you'll see is there's a great deal of assets that we hold in common. Those assets are already perceived by the outside world as all being world-class. And even internally, people in my traditional agencies, like BBDO and DDB, have tremendous respect for the Leo Burnetts and for the Saatchis and all the rest. So that's part of the portfolio. On the Publicis -- or I shouldn't say -- I'm going to say, okay, Publicis side, Maurice and his management have made investments in companies like Razorfish, companies like LBI, which have skills that go beyond the traditional skills we're embedding in every one of our companies, and he does in his as well, which are technically competent that can operate within -- on campaigns and from a messaging point of view, to deeper tech. We, on the other hand, have I think assets that they don't have. CRM, we're the strongest in the world. Public relations, we're deeper into public relations than Publicis is. Health care, I think the combination of the 2 will clearly make us the leader. And as the world emerges out of -- among the many things that emerging middle-class needs is health care, and I'll be willing to invest money, we're the leader, having the greatest people in that. So Maurice is absolutely -- and we've had a long history, because we've had DAS, of determining how to cross sell and where to cross sell services across our portfolio. So we know how to do that. We've been doing that for years and years and years. We'll get now the opportunity to do that with Publicis clients. We'll get to take those assets that we don't have in our portfolio and also spread them across Omnicom's assets. So the upside opportunity is going to outlast both of our careers, I mean, just because of the strength of what we have. We also are building many of the same things, perfecting them and investing P&L-type dollars in creating them, that we will now get to, in many instances, create ones and quicker, faster, more powerfully because we'll make decisions about what areas we want to get. So I don't think we're going to have the need, based upon the portfolio, to do large acquisitions for the foreseeable future. There will be acquisitions for a number of areas, but it will allow us to continue to generate the best cash flow in the industry and return it appropriately to our shareholders, and we won't be limited from a resource point of view.

Maurice Lévy

Just to complete on what John has said, if you look at the weaknesses that we had, clearly, there are 2 areas where we had almost no assets. One is on CRM. This is something that we wanted to build, and there is an operation which I come to know at Omnicom. And the other one is on older operation, which are field marketing, super marketing, branding, where we have almost no assets. On digital, we have very sharp and a very more technology approaches and capabilities. And what we have done with VivaKi, with DigitasLBI, the product that we have created, what Razorfish and Rosetta are doing on e-commerce, how we are building the suite of services for our clients, these are capabilities that are exceptional and which are giving us an incredible push in terms of growth, and you have seen the numbers recently. And this is something which, when we will be offering this and putting together the teams of BBDO or DDB with the teams of DigitasLBI or Razorfish together, looking at the client list, it will happen what's happening today with the Saatchi, the Leo Burnett or the Publicis client agencies. They will look at the client list and the people will get excited to say, "Yes, I want my client to get this." Why is that? Because they don't want that a third-party is coming in the game, and they prefer that it is a sibling, which is taking care of this part of the business. The same when we will be sitting down [indiscernible] with all the other assets that John has in his portfolio, and the reaction will be exactly the same. That's the reason why you can count for the next 2 years to add 100 basis points in terms of growth, clearly.

Unknown Attendee

Despite there's positive operating margin particularly between [ph] Publicis and Omnicom, is there a fundamentally different approach in relation to efficiency, or is it more in relation to [indiscernible]?

John D. Wren

Mostly, mix of companies. Randy, you explain it. So why don't you go ahead.

Randall J. Weisenburger

Nicholas [ph], the biggest difference is our field marketing operations. We have what I'd kind of describe as fulfillment operations. They run relatively low margins, certainly on a scale basis. But frankly, they have very little cost to, I'll say, cost of capital to invest. You take that on contrast to, say, media. And the media businesses, at least our media businesses and I assume Publicis as well, have higher margins. But there's certainly some more investment along the areas of trading desks and digital platforms, et cetera. So frankly, you need a higher margin to fully justify it from a return on capital basis. If we look at our mixes, those media business is about 12% of our revenue, and it's 18-plus percent -- I think it's 18% excluding the digital piece. So it's -- I don't know the exact number, but it's quite a bit larger than ours on a percentage basis, and on a dollar basis, flat out too.

Maurice Lévy

And there was also some few tools that we have agreed to use and we discussed the production platforms. We have some production platforms which are exceptionally good. We had building the production platform in Costa Rica and Colombia. We have, between the 2, something like 600 people. We have about the same amount, maybe 800 people in India. We have a very strong base in Mauritius, and these are highly skilled people in a low-wage environment that will be accessible now to Omnicom. The same for the shared service. They have done a few. We have much more experience. We will sit down during the transition period, look at the very good things that they have done, the one that we have done where we see what has to be the new system. And we will implement the shared service in a way which will be satisfactory to everyone and which will generate some interesting savings. So we [indiscernible] the synergies chapters. So when you look at all the various aspect of this transaction, you see that from a strategic point of view, we are creating something, which will help us to be at the forefront of what will be happening tomorrow and the transformation of what's going on currently in our industry, with the Big Data, with the big players, with the change in landscape, with the blurring of the roles of all players, et cetera. If you look at the clients, this is something we already tackled, and we believe that we will be able to manage all the issues, and we will bring to our client services, agencies, operations, which are really the best in class in the industry with a collaborative spirit, with an integrated approach and with a security. This is very complex work that our message will go through despite the numerous ways of communicating with the people. And in term of margin, EPS and all the results and the financial -- the balance sheet of the company, the financial statement, what you would see is something which will be extremely compelling and which will bring a lot of experience [ph]. I think it would be [ph] exciting to hear John about talent because this is something where they have done a lot. All the industry is really in a frenzy with what they have done and [indiscernible].

John D. Wren

Going on 18 years, we established the real need for training and development of our people. And so we started with Omnicom University and then we've invested quite a bit in that area in terms of how you bring somebody new into the business, what you train them on, how do you develop them, and we have that. In terms of succession management, we have detailed plans for every office, every significant client around the world, not only who's leading something in a small office in India to who that individual successor would be if some accident occurred; who, if you have 3 years to train and develop somebody, who that individual would be; and 5 years out, who that individual will be. Now there's a lot of white space, as you can imagine, in the system, but it's constantly updated by our folks. And it helps guide us when we're developing and training people, the type -- the level of training we want to put them through and the speed in which we want to do it. Because at the core, I mean, what Maurice outlined, what I outlined, the only obstacles to them, truthfully, because our clients are dying to get somebody who can handle all this complexity and make intelligent strategic choices with them and advice, our only limitations are time and getting people educated as to what services or where and why these will benefit people, and talented people. So we'll be able to deploy those systems [indiscernible] we were lacking that they have and vice versa. So there's real upside in having the information, having it organized, knowing what you're doing and knowing what expectations you have with the new management that will aid this success and reduce the amount of time that will be needed to achieve our objective.

Unknown Attendee

[indiscernible] historically on e-commerce [ph], giving back more free cash flow to shareholders [indiscernible], can you explain the reason for that [indiscernible] historically and what the new combined revenue [ph]?

John D. Wren

Sure. I cannot speak for Publicis. I'll let them speak, not yet, but I'll speak about what we can speak about and what I know. Omnicom, long ago, because we didn't feel we had the need, because we had developed ours through size and to the extent that we had and because we had some of these other things, we passed on a number of large acquisitions because it wasn't necessary. What we've told our shareholders since the dawn of time is that we generate a lot of free cash flow, and we'll return it to the shareholders through dividends, through acquisitions, which we want to always hold back some cash for in case we change our mind on a particular asset. And then we'll use the balance to return to shareholders in other ways, with the objective of investing that cash on a regular basis. I think Publicis, we've already agreed that the dividends of the new co will go up. I think the need for big acquisitions, at least in the near term, neither of us can see the need for that. We'll still probably do acquisitions, but not to the size and use of cash that has been required in the past. And then the balance of the cash and how it gets disbursed will be up to our Board of Directors really. But it will have a very strong recommendation for us that it would be returned to the shareholders.

Maurice Lévy

Let me just add there, most of you know the story. We had to build capabilities in order to face the various changes of the world, starting with the globalization and then integration and finally digital in the emerging markets, and we needed to invest quite heavily. And we did it very cautiously. And at the same time, we had been able to generate formidable cash flow, and we are one of the cash machine of the industry, as well as Omnicom is. And we promised to the market when we met since -- we did this since about slightly more a year ago. In fact, we started to indicate to the market at the end of 2011 that we will increase progressively our dividend payout ratio to 35%. And the fact is that we have done most of what we had to do in terms of acquisitions, that the next step that we had was on CRM. And it happens that with this operation, we don't need to do it. And the good news -- and the immediate good news is that we will have a payout ratio which will jump immediately to 35% because unless if the board decides otherwise, but all the things that we are telling you is something which has been approved by both boards. So we are not speculating on what the decision of the board will be. And as soon as next year, you will get on top of the exceptional dividend that you will be received -- that our shareholders will be receiving. They will be also receiving a 35% dividend for the 2013 profits. So this is something which has been extremely clear and well established. And when you look at the combined cash flow, free cash flow that we are generating, I think that we will have the means to keep a very low, prudent debt-to-equity ratio or debt-to-EBITDA ratio. This is something we will keep at a very low level, and we think that we will retain our BBB+ investor grade. And we think that we will be able to distribute a fair amount of the profit either through a dividend or through other means.

Unknown Attendee

Do you think [indiscernible]

Filippo Pietro Lo Franco - JP Morgan Chase & Co, Research Division

I have been asked to repeat the question for the audience.

Maurice Lévy

Sure.

Filippo Pietro Lo Franco - JP Morgan Chase & Co, Research Division

The question is if the different strategy has been attracted -- attracting different kinds of other shareholders.

John D. Wren

Right. We're headquartered -- we remain with headquarter operations in the same places. So yes, there are different shareholders, and there are a lot of overlapping shareholders as well. Our strategies and actions have been expressed differently, but I think we're both ultimately aiming towards the same objective, which was to be of greatest benefit to our clients and assemble the people, talent, assets which can solve that. And we paid a very fair price for a very premium service. And how it's gotten articulated, because we both had the story from different levels, that might be different, the story on one market versus the story in another. But the principles, the objectives, what we're doing, who we're doing it for and what we expect for it in return, those things have been common. So I can't speak to the mind of the shareholder, but just what we were trying to do with our organization. So...

Maurice Lévy

It's difficult to know. But Yohann, go ahead.

Yohann Terry - Exane BNP Paribas, Research Division

Just as related to the [indiscernible], I mean, when you look at the [indiscernible], you look at the risks involved in the transaction itself, which obviously there were [indiscernible]. Well, for me, it's certainly to get a sense of the kinds of survey [ph] on the dividend [ph] side, if it's generating some of that accretion to the balance sheet [indiscernible] people to do and whether that was through acquisition or a buyback. But assuming what you've got in mind as an endgame for this 3 or 4 years from now [indiscernible] the company [indiscernible] that will take -- if we could break down where you are now relative to the option value of upsides, are you able to give us a sense of how much it's likely to come from order costs and [indiscernible] the lower risk but not make enormous amount of debt [ph] in terms of EPS.

Unknown Executive

[indiscernible] between I got the...

Filippo Pietro Lo Franco - JP Morgan Chase & Co, Research Division

The upside that will come of the synergies from cost and the one from revenues, more or less?

Maurice Lévy

Okay. As you mentioned, probably say [ph], I would like to precise 2 or 3 things because I think that some people have written some elements, which are not very precise to say the least. First thing I would like to stress is that we started to indicate that we will improve our margin in the Publicis Groupe in February 2012. So it's not something that we indicated recently because we knew that we will be doing the deal in order to push or bump our stock price as this has been suggested by some analysts. I think that the analysts who wrote that were probably not paying attention to what we have been saying since February 2012 consistently, and that we have developed in France on the 23rd of April, when we were not yet clear if we will be doing something or not. So I think this is important for the record. The second thing that I would like to stress is that on the risk -- and Jean-Michel will cover with maybe Randy the synergy. The risks of this operation are extremely, extremely low. Many of you know me and many of you know that I have been through numerous transaction, and I remember when we did the Saatchi deal and the reaction of many analysts saying, "Wow. This is a broken company. This is the most broken company on Earth, and why Maurice is doing this deal? He's absolutely crazy. They will lose everything." At the end of the day, it has been fantastic. When we acquired Bcom3, which was about our size, it was 80% our size. Reaction was the same, low margin. Bcom3 was delivering 8% margin, low margin, complicated company. D'Arcy is not a very good agency. They have some good assets, but why is he doing this? There is so much risk in this operation that they will lose their soul. They will be distracted. We had the best organic growth during the period. We solved all the problem. We managed all the issues, and we have been able to integrate them swiftly, nicely. And we did something which was a first in the history, which was to dismantle D'Arcy and to redistribute, reallocate the accounts to aid [ph] Leo Burnett, Publicis or Saatchi and to reallocate the people. And it has been a tremendous success, and I can go to the acquisition of Digitas or that of Razorfish, where people were thinking that Razorfish was a great operation when they were with aQuantive and they had lost a lot of traction due to the 2 years that they spent with Microsoft, which was utterly wrong, but people were saying this. So I think that you should look at the reality. This transaction is big, is very big, but the risks are very, very low and the distraction will be minimal because we are not planning to merge BBDO with Leo Burnett. We are not planning to merge OMD with StarcomMediaVest or with ZenithOptimedia. We are not distracting our people. The distraction, if there is any and there will be some, will be for a small group of people at corporate level. So I had to say that because I think that the vision is today obstructed by a lot of communication which has been made by people who feel extremely insecure by what we are doing, who feel extremely anxious, a lot of anxiety. And I know that Ambience [ph] will be sold at a very high price here because this is generating a lot of changes in the industry, and some will have to look for assets which are highly priced and poorly qualified. This is what may happen for the next step of the consolidation. The risk associated with this operation, which is not an acquisition, it is a merger of equal, where you have 2 gray hair, experienced -- I have more gray hair than John, fortunately. This is -- that's the reason why I have more gray. But -- and this is an operation, which will be ran swiftly, easily and there will be minimal distraction and minimal risk. So the idea that the risk associated with the synergy is not a good balance, sorry to say, we know each other quite well, is not a good one. I think you will be extremely surprised when we will be doing all the necessary work. It will go fast. Integration will happen immediately. And when the people will see that all this will be generating good growth and it will be generating a lot of positive aspects, I can tell you that this is something that we work extremely positively for the interest of our clients.

John D. Wren

And before we proceed, the only thing [ph] -- I'll keep it brief. They've done bigger acquisitions, integrated. So they have a way about it. I sat at the table when the last big merger of equals occurred, which was in 1986, '87, when Omnicom was created. And I have a lot of experience in what was done exceptionally well, which resulted in what Omnicom is today, and a few things which encumbered it, which are mistakes that don't need to be repeated, and we've made certain that we're not going to repeat those. So with that, I can go to the synergies, but I completely agree, it's these people wanting to see ghosts or create ghosts. There's nothing to beat [ph] them.

Filippo Pietro Lo Franco - JP Morgan Chase & Co, Research Division

The second from Liam [ph].

John D. Wren

[indiscernible]

Maurice Lévy

Maybe Randy will add something.

Jean-Michel Étienne

A few thing I want to clarify, a few thing about synergies. You have heard about the $500 million of synergies, but these synergies are purely -- will be purely the result of combining the 2 groups. It is something [ph] that we did not have when we spoke to you on 23rd of April. On the Publicis side, I must tell you that all the cost initiatives that we have launched, and they are ongoing already, will be delivered. We're working on that. This will happen. So we need to be extremely clear on that. I mean, so the $500 million are purely the result of the combined group.

Unknown Attendee

[indiscernible]

Maurice Lévy

Yes, it is [indiscernible]. It's not a satisfaction [ph]. No, no. I have to be [indiscernible] because you know, I have to give some very strong subtitle because everything that we are saying here, we have somebody who was interpreting what we are saying, and as I'm French, my English is very poor. And fortunately, I have a friend here in London who is speaking for myself. So some time, in French, it's very good. I have to correct what he is saying.

Unknown Attendee

Is it going to be harder to achieve that 3 to 4 on Publicis, though, given the distraction of a huge merger?

John D. Wren

We are working already.

Maurice Lévy

[indiscernible] The train has actually left the station already on that issue. The train has left the station. You have to understand that all the initiatives that we have taken, they are...

John D. Wren

Ongoing.

Maurice Lévy

Ongoing. We have not said to the market from the 23rd of April, here is the plan and we will start, then scratching our heads and say, "Okay. How are we going to do that?" As I said, the train has already left the station. We are already acting in that direction.

Unknown Attendee

[indiscernible] $500 million [indiscernible] ongoing cost issue [ph], an example [ph] will be ERP initiatives that Publicis has, that Omnicom don't. If you roll that out across the group, that would be a savings [ph] that Omnicom won't going to achieve. Is that sort of [ph] saving in there? Or will you find [ph] when you leverage [ph] these 2, you get more savings?

Filippo Pietro Lo Franco - JP Morgan Chase & Co, Research Division

Yes, the question is that if [indiscernible] $500 million of synergies, the guidance that have been given by Publicis for their own margin improvement are still there.

Unknown Attendee

No, no, no. That wasn't [ph] the question.

Maurice Lévy

No, no. The question is [indiscernible].

Randall J. Weisenburger

Where are the synergies coming from?

John D. Wren

Yes, that is the one.

Randall J. Weisenburger

So the synergies are here. The synergies that we put in, in this model. Jean-Michel and I sat down and went through basically our cost structure. And when you think about it, there's about $4 billion on a combined basis of nonlabor and service-related costs. So we looked at those and look at the scale opportunities almost line by line. We didn't go agency by agency. So we took them at kind of a high-end level, and I think we both have a pretty good idea of how scale can help in those costs. We then went through and looked at salary and service and thought about the efficiencies that we could get in various operations, various countries around the world, where we probably don't need duplicate operations. We also think about, although we didn't think terribly hard about it, there's about $90 billion worth of spending -- $9-0 billion, between our billings number and our revenue number. There are bound to be a number of opportunities, frankly, both on the revenue side, as well as on the savings side in those numbers. So when we've stated the $500 million, I think we're all pretty conservative with those numbers. In combining ERP systems, other things, based on the conversations we've had to date, I think Publicis does some things that are probably very good, that I'm sure are very good. I think we do some things that are very good. And I think when we get together and figure those out on a combined basis, there's going to be more opportunities than what's there.

Unknown Attendee

So they're not built in?

Randall J. Weisenburger

They're not built in. To go back, I wanted to kind of just put a summary on your question, so because we think about risk a lot. So on the revenue side, it's, I guess, the client lost risk, which obviously the companies, the holding companies are very good at managing, but certainly, to understand how people could think it's a risk. There's also the upside, though, of all of the things that Maurice and John talked about of bringing the organizations together, being able to introduce new services. They may start to net out quite a bit. We actually think it's revenue positive. Then you get in $500 million of just straight up scale savings, and there's about $80 million a year of tax savings. So I think the upside is significant relative to the risks, and people all want to talk about only the risks. The upsides that we're talking about are not high-risk upsides.

Maurice Lévy

I think it should be good if John could say also a few thoughts on the soft synergies and the soft advantages that we will get.

John D. Wren

There are all sorts of positives, which create benefits for our clients throughout this entire process. By the way, just one final word on the synergy, so that's how we got to the numbers that we've put in the presentation from a deal that we kept secret from the world. And the only reason we kept it secret is because we didn't have vast groups already working on. Otherwise, you would've known about this before my wife did. In any event, so what we'll do now in the intervening period, between now and working on getting the necessary approvals, is we'll put the subject matter experts from each of our companies together in these little subcommittees and they will go through and start to discover where very specifically and on a granular level, which -- what we should be doing as soon as we're able to do it, as if we're able to act. So I'm sure at some point later on before we final -- get final approval, we'll have a much clearer view of the timing and the amount of synergies that we're going to achieve. But it's all upside, both the way we're viewing it: hard upsides, real upsides. We think we have enough experience to mitigate the risk. And we think we'll be in a completely different position for completely different reason, and that is when you look at -- and this deal wasn't done, as Maurice said, much earlier for size, but to the benefits, among other things, to our clients. With the amount of media that we buy in a particular market, we're not going to hurt -- we've never hurt our suppliers. We've always been ethical in the way that we've treated them. That is going to continue. But you can imagine, if you're the biggest character in a location, and let's say you have clients that want special treatment -- the World Cup -- not special treatment, but place with the World Cup or the Super Bowl or the Grammys or what -- go on and on and on. I would imagine the media handling that will probably stop at our door before they get to our next biggest competitor and say, "Is there any way that we can accommodate you? Is there anything you have a special need on? Is there any positioning that you have a particular interest in? That will also help ease the concerns of some of the players that have been thrown up in terms of when we get an opportunity to go back to our clients, sit down and explain to them that we're not doing this for size. We're not simply doing this for financial reasons. We're doing this to create opportunities and to service them better. All sorts of things are soft, but really huge derivative benefits when you're approaching it through that lens, and that's also what we plan to do.

Unknown Attendee

[indiscernible]

Filippo Pietro Lo Franco - JP Morgan Chase & Co, Research Division

The question is about what has changed in the past and now in terms of acquisition strategy.

John D. Wren

Look, there's nothing that changed. I mean, just to give you a real life recent example, LBI. The #2 bidder for LBI was Omnicom, all right. It wasn't much that we didn't get it. Luke Taylor still remains today a dear friend of mine. But -- so it's not -- he just beat me on that one. I don't send press releases out when I lose, so...

Maurice Lévy

Good idea.

John D. Wren

I know. This is -- I have to re-pick [ph] them somewhere along the way. But we've always admired and known what those assets are. It's how we prioritize what we were doing. I mean, with the tech skills -- and I don't want to tear every company apart; otherwise, we'll be here for breakfast tomorrow morning. But the capabilities that he has in building certain products which we has and he's starting to sell, build platforms, to build e-commerce or rebuild e-commerce sites, those are embedded in many of the acquisitions that he did, in addition to the things we had prioritized and we're working on, which was to get everybody in our, what was called traditional agencies, digital savvy. So it really had more to do with how did you prioritize it? What were you willing to pay for that priority? We came very close to getting LBI, and it was just a great a priority, made it easier for him to get there than me. But it wasn't that we weren't there. So they are complementary. We do desire them. They were on our list, and now my list is more or less complete. We have enough raw material to work with here, to build something that is rather new and special. So I don't know if this clarifies it for you.

Unknown Attendee

How is the combined group going to be better able to compete against long-term [ph] agency entities, nontraditional agency entities? And I think that a big, big concern is that this is also showing that strategically, agencies are a bit worried about the competition from software and you kind of getting together.

John D. Wren

Yes, no...

Maurice Lévy

[indiscernible] Go ahead.

John D. Wren

Oh, I'm sorry.

Filippo Pietro Lo Franco - JP Morgan Chase & Co, Research Division

Actually, it's a very good question. [indiscernible] The question is that how the new entity is going to be able also to compete with the nontraditional agencies and how they're going to deal with the competitor coming from the software world, if they're going to make it stronger or not. I think that they -- actually, I can adapt something because I wrote a couple of months ago, a big report about the CMO, CIO opportunities and identified $3 trillion, look, that's a big number, of a potential addressable market in the future for the agencies, so -- which is not the traditional one. They're not coming from A&P spending. So how we can address this.

John D. Wren

Sure. I mean, the first thing you should know -- way before I knew Maurice, I worry about everything every day. And when I don't have anything to worry about, that's what really makes we worried. So that's why I'm sitting here, more than anything else. We're not -- we're cognizant of what's going on in the marketplace, how we're interfacing with some of the giants. So far, it's really been through partnership and collaboration for the most part. I think from the emails that he and I both have gotten from the Google, from the leadership and from Sheryl [ph] and others, they're excited about this. We're excited about it. We see it only deepen our relationship, not going to divide it. As my belief, but I'd worry about it, as Accenture hires somebody and the lines start to blur and they come across, what I've -- what I think they will discover is that because we not only have the tools, we have to create the ideas, and we have to do the execution, they really only have the appetite for a part of that pie and they won't pursue it in any meaningful way. But they do exist. We have to be aware of them. They're not a threat today. They're really an opportunity for us to go deeper in what we are great at because we do it all from ideation down through execution, and we have a lot more experience. I think if the marketplace opens up, we can drift into more of their space than they can drift into more of ours is what I think. So -- but we're not doing this to build other resources to go build the duplicate of Accenture and compete with them head on head. I mean, that's not a desire.

Maurice Lévy

Yes, we know and we see that Accenture or Deloitte acquiring some digital agencies. These are some things that has not escaped from our attention. And we know also that they are trying to build some competencies in the field of branding and strategies. And this is also something which is happening from the consultant, McKinsey, Bain, they are all going in that territory. As John said, not only we are capable of doing the very high-level reflection on what the brand stands for, what is the destination for brand, what they have to do, how they have to communicate, et cetera, but we execute. And the difficulty today, and this is where we have an advantage, which I believe is second to none, we already, we, at Publicis, had a clear advantage in the field of the new world. That advantage has strengthened for 2 very important reasons. The first one is scale. We will be in the game of scale. We already mentioned this. It is something that I covered during the presentation of 23rd of April. This is something that we started to mentioned last summer, I'm speaking a year ago, when we were starting to see an evolution to some issues of scale, and we have to deliver at scale. When you look at how, today, we are delivering a very small message to a cluster of people, we have to crunch zillions of data. And that is the particular aspect of this new world. The more we have data, the more we crunch the data, the more fine-tuning we can be when it comes to messaging and to targeting. And for that, we need to invest more, we need to add more tools and we need to do a lot of things. That is something which is extremely important. I would like to add something which I believe is also extremely important, which is the second point. Already today, we have with VivaKi with what we are doing with the platform, we have been the very first to have agreements with Google, with Facebook, with all these people. Now with the combined entity, we will be the go-to person when they have a new idea, an innovation, when there was a newcomer. They will knock at the door. If there was a door that they have to know the address, it is ours. They may be lost because we will be partly in Paris, partly in New York. But at least, this is helping them because the people who are in the U.S. will knock immediately at one door in Madison Avenue. And the people who are in Europe will knock immediately at another door, which is on the Champs Élysées with a priceless view, which is leading us where we are today. So when you look at all these aspects, you see that again -- and I'm sorry to repeat it, but I think I need to repeat it, taking all the elements of these merger of equals, including governance, because people say, "Governance? Wow! Complicated. A French man on the one hand; an American, arrogant, on the other hand." And the Frenchman is the arrogant. This could have been true -- it's probably true in the mind of some people, and they could have been true without the 2 of us 10 years ago. 10 years ago, I would certainly not have accepted for one second to share anything. I had an appetite to build Publicis. I wanted to do it. I had a mission. I was on a mission today. I'm an old man, completely tired, 71 years old, and I'm thinking about going fishing, skiing a little bit without breaking my legs. And honestly, I know the age I am. I know what the future is. I have a deep, deep respect for John, for the person he is, for the value he's sharing, for the attitude he's having with the clients, with the people, the respect he's having for the competition and the fact that he has been always extremely respectful for Publicis Groupe and what we are doing. We are sharing clients. Never a client had to say, "Look, come see me, blah, blah, blah. Never." I would say the same from -- with our competitors. And I know that with this operation, we will build something, which will be second to none and which will result on a lot of value for our clients, for our people, for our shareholders.

John D. Wren

Sure. And I would -- as I said, I wouldn't even contemplate this with anyone else. Each of us, other than Maurice, because of the respect that I have for him, the governance issues, which we went through the pain of negotiating all those prior to getting to signing the actual documents themselves, are very thoughtful and look not only at the present, but into the future to keep the balance where it's necessary alive. And it will explain a lot to people who have decided to -- who have their noses over their skis and what they're speculating about at the moment. And we look at it. Neither of us really had -- or compelled to do this. Our boards, our employees, would have supported and endorsed us while we're on the journey, in whatever fashion we wanted to. The only thing that motivated us to do it was the possibility of what it would create. After looking at the rest, knowing that by doing it, we were both taking very, very, very strong, solid legacies, him for 40 years, me for 30 years, and putting them on the table, that this transaction, not for financial purposes personally or neither of us is going to get a lot wealthier as a result of it, it's to create something that we had dedicated our lives to create anyway. So we're going to do everything in our power to mitigate risk. We're going to do everything in our power. We're not going to change our behaviors because of this, and we're going to govern the company in the same respectful and thoughtful way. And I think separately, as we said [ph]. But it's all been thought out a lot further than some of our competitors would like you to believe. And I'm not -- I've got half of my business in America. The other half of my business is around the world. He has a percentage of his business in France and a percentage of his business everywhere else. The people that work for us are covering the globe constantly. We're not dug in with manufacturing plants in one country or the other and it's one we're going to be winner or loser. We had to nurture and develop cultures that are absolutely global for a long time.

Unknown Attendee

[indiscernible]

Filippo Pietro Lo Franco - JP Morgan Chase & Co, Research Division

So there are 2 questions. The first question is about the future of Maurice Lévy as potential succession, and the second one about the CFO.

Maurice Lévy

Okay. We have set up something which is quite clear. There is a first period of 60 months, 5 years. We'll just split it in 2 different period. The first one, we are co-CEOs. And this normally should help us to solve all the issues of the transition. Then John will be the sole CEO, and I will be the Chairman. So you have 5 years of tranquility, if I may, and you can buy the stock and you can sleep. We will be taking care of your interest.

John D. Wren

And then after the 5 years, whenever I step down or I'm succeeded, I then become the Chairman.

Maurice Lévy

Exactly.

Unknown Attendee

[indiscernible]

Maurice Lévy

That was -- we can't say it now, the plan. And Jean-Yves deserve it. He knows that there is a -- something which is major and which is happening now. So he's aware. He has been part of the team, not at the first step because during the first step, it was only John and myself, and I was reporting to Elisabeth Badinter because she had to say yes or no immediately. If she will say no, I would not have done it. I have always dealt with all the issue in a harmonious way with her. So I hope that Jean-Yves will be happy with what we will be working on after the transition period. The transition period is something. We will have a team working on the transition, 50-50 percent of the same -- we are doing everything equality. And we decided from day 1, it's equal amount. If it's not equal, it doesn't work. I have to lose a few pounds to be equal, that I have accepted to do that. Everything has to be equal. We will have that committee and we will have subcommittees, which will also be on an equal basis for each discipline. And we will have so the media, the advertising agencies, the digital, CRM, all the other disciplines to see how we can best take maximum advantage of what we have and obviously, this will be the major task of the CFOs. All of the aspects of shared service, of synergies, of procurement, because Randy said it, this is something that people will have another idea. We will have something like $4 billion of third-party, and I don't see why our clients are putting some pressure on us, and we should not put some pressure on our suppliers, nicely, because we are nice people, and without...

John D. Wren

We can help them build their businesses. There will be more important jobs.

Maurice Lévy

Yes, he was laughing when I said I was nice. This is something -- okay. Who is this guy...

John D. Wren

If you look at...

Maurice Lévy

He's taking a different train. Is that the reason?

John D. Wren

If you look across the tasks and the speed in which we want to deliver them and the talented people that are on our individual teams, we have more tasks than we have -- than people. So there will be important jobs for anybody who wants one. And we said we would balance it out and we would make sure it looked and acted that way. So that's as much as I think we want to get granular on that because we have a lot of work to do.

Unknown Attendee

[indiscernible]

John D. Wren

No. When it's appropriate, we'll make that decision, and that's when we'll tell you, so that you needn't worry about any of it.

Filippo Pietro Lo Franco - JP Morgan Chase & Co, Research Division

Are there any regulatory issues or hurdles that you can speak of [indiscernible]?

John D. Wren

Well, we've taken advice throughout this whole process from very competent attorneys.

Maurice Lévy

Oh yes, and they're very expensive also.

John D. Wren

Yes, very true.

Randall J. Weisenburger

It's a complex structure from a, I would say, regulatory standpoint. So we're going to have to do filings both in Europe and in the U.S. So it's certainly going to take us some time to do those filings. On a go forward basis, we're going to have to report in U.S. GAAP and IFRS. So we've got to get the systems and things to do that. From an antitrust perspective, there's a number of filings. There's about, I think it's 13 jurisdictions that cover about 41 or 43 markets. As John pointed out, we've had a lot of advice at this point from antitrust attorneys and economists to sort of break it down into talking points a little bit. They kind of divide our industry up into 2 sections through the services side of our business and the media buying side of our business. On the services side, there really has never been a concern historically in deals about concentration or antitrust because of just the nature of those businesses. On the buying side, there's been a focus. There's never been a deal stopped or an ultimate issue. Putting it in balance with the companies, on a combined basis, that's about 15% of our revenue is media buying and planning. And they look at this -- or historically have looked at this market by market. So -- and that's country by country, not jurisdiction by jurisdiction. So there's 40-some jurisdictions that you're going to divide that 15% of our revenue by, and we have multiple brands in each. So whether there is an issue or isn't, we don't believe there will be an issue. It's not a material -- no one piece is a material component of the deal that would really hinder it in any way. So I don't think there's any completion risk. There's going to be a lot of work, a lot of filings, a lot of information. Jean-Michel and my job of collecting that data will be quite challenging.

Jean-Michel Étienne

These are staffed [ph] already, by the way.

John D. Wren

And none of the retro [ph] -- or it's like really easy to get, soft, stupid information, which is not true, should be used in making any analysis. Those are not -- one, they're not correct. They're correct as to trend, but not as to accuracy. And two, they don't take in what we actually do and what, when we file these papers, will be included and defined as the market. So...

Randall J. Weisenburger

We also believe they're going to look forward thinking as opposed to trailing. So with the new media and new communication channels that are out there, it's just a very different world than looking backwards.

Filippo Pietro Lo Franco - JP Morgan Chase & Co, Research Division

I don't think that we have time maybe for the last question. If there is any last question? I can see that.

Unknown Attendee

Can you just [indiscernible], but can you just comment on the confidence around maintaining a rating [indiscernible] agencies?

Maurice Lévy

I don't know for the S&P. What I can tell you is that I spoke personally with the 2 important bodies who are responsible for that on Saturday, so just prior to the announcement, and again on Sunday at the time of the announcement, because we wanted also to suspend the trading of our shares in order to start at the same time. And when I asked about the CAC 40, the answer was it will be a first, and it's always good to have a first. So I don't -- when the committees will be meeting, if this would work or not. But the feeling we have is that it will work. Yes, it is in the -- sorry, Randy, you will speak -- but it is in their interest that when you look at the position that we will have in the S&P, that we will have in the CAC 40, it will be both interest to keep it. Sorry, Randy.

Randall J. Weisenburger

S&P is more technical, so if we're -- the way that the company is structured, I don't think there's a possibility of not being in the S&P.

Maurice Lévy

Yes. This is most clear. And I think as we will be the #12 or 13 market cap in the CAC 40, I doubt that they will say, okay, we don't want you in the CAC 40. I really doubt it.

Filippo Pietro Lo Franco - JP Morgan Chase & Co, Research Division

Okay. So this was...

Maurice Lévy

Before we close, I think it's important that maybe we say just one word in closing, which is, one, strategically, this operation is really built for the future, and it's something which is welcomed by the platform and welcomed by most of the client because you have not asked about the reaction of the client. I'm telling you, on both sides, we had numerous emails from the client applauding, saying this is great for us because they see what we can get out of it. It's great for our talents, and it's great for you, and you will have -- and for our shareholders, a 35% payout as soon as next year. And on the synergies, I think that we have been quite clear, and our commitment is also quite clear. And we have something else in common, which I think you will hardly see in the industry. You take the last 13 years, we will start with 2000. You look at indications, the guidance which have been given by John when he's giving the guidance, which is...

John D. Wren

Doesn't [ph].

Maurice Lévy

Wait, he doesn't [ph]. You see that they have been delivering exactly like a clock, boom, boom, boom, on a regular basis. If you look at Publicis, we always deliver on our promises. And if you look now at the statistics during this last 13 years, you will see that on organic growth, I'm speaking about organic growth, you will have always either Omnicom or Publicis as #1. And that was annoying because sometimes we were #2, sometimes they were #2. And we decided by doing Publicis Omnicom group, we will always be #1 in growth. Thank you.

John D. Wren

Thank you very much.

Filippo Pietro Lo Franco - JP Morgan Chase & Co, Research Division

Yes, thank you, everyone. And this is the end of the conference call. Thank you very much.

Maurice Lévy

Thank you all.

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Source: Omnicom Group Inc., Publicis Groupe SA - M&A Call
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