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Overview: Davidson Kempner Capital Management’s 1Q14 positions

Part 2
Overview: Davidson Kempner Capital Management’s 1Q14 positions (Part 2 of 8)

Why Davidson Kempner opens new position in Omnicom

Davidson Kempner and Onicom

Davidson Kempner added new positions in Omnicom Group Inc. (OMC), Alpha Natural Resources Inc. (ANR), JPMorgan Chase (JPM), Brunswick Corporation (BC), and Vitamin Shoppe Inc. (VSI). It exited positions in Perrigo Co. Plc. (PRGO) and Apple Inc. (AAPL).

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Davidson Kempner initiated a new position in Omnicom Group Inc. (OMC) that accounted for 1.93% of the fund’s 1Q portfolio.

Omnicom is a leading global advertising, marketing, and corporate communications company. Omnicom’s branded networks and numerous specialty firms provide advertising, strategic media planning and buying, digital and interactive marketing, direct and promotional marketing, public relations, and other specialty communications services to over 5,000 clients in more than 100 countries. Omnicom is one of the big four agency companies, second only to WPP (WPP.L). Publicis and Interpublic are ranked third and fourth, respectively.

Omnicom and Publicis end $35 billion merger deal

Omnicom Group (OMC) and its French peer Publicis Groupe said last month that they have called off their $35 billion merger. Both companies had agreed  in July of last year to a merger of equals, creating the world’s leading company in communications, advertising, marketing, and digital services, with combined 2012 revenue of $22.7 billion. Publicis owns ad agencies such as BBH, Leo Burnett, Publicis Worldwide, and Saatchi & Saatchi.

A press release said both parties jointly announced that they’ve terminated their proposed merger of equals by mutual agreement, in view of difficulties in completing the transaction within a reasonable time frame. It further added that the parties have released each other from all obligations with respect to the proposed transaction, and no termination fees will be payable by either party. News reports noted that besides tax and regulatory issues, there was a struggle for control and a “cultural clash” between the two organizations. The reports noted that there was disagreement between both boards on key management appointments such as the chief executive officer (or CEO) and chief financial officer (or CFO).

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Omnicom continues its acquisition streak

Omnicom said it continually seeks to grow its business with its existing clients by maintaining its client-centric approach, as well as expanding its existing business relationships into new markets and with new clients. Plus, it said it pursues “selective acquisitions of complementary companies with strong entrepreneurial management teams that typically currently serve or have the ability to serve its existing client base.” Omnicom acquired India-based digital agency 22feet in a move to expand aggressively in emerging markets. It had earlier acquired Mood, an advertising agency in Brazil, and said it seeks to expand its footprint in the LatAm region with the acquisition of integrated digital solutions provider Media Interactive in April. It recently acquired Germany-based independent advertising agency Heimat, and United Kingdom-based brand and retail agency Haygarth.

A Bloomberg report cited Martil Sorell, the CEO of the U.K.-based ad company WPP Plc. who said consolidation in the space will continue with Japan’s Dentsu Inc seeking a takeover of Interpublic Group of Cos. and Vivendi SA making a bid for Havas SA. Dentsu completed the acquisition of Aegis Group Plc. last year.

Omnicom signed ad deals with Instagram and Twitter

According to reports in March, Facebook’s (FB) Instagram service signed a $100 million ad deal with Omnicom. Some reports pegged the deal at $40 million as the two companies refused to discuss the terms. Omnicom’s clients include Nissan, AT&T, Pepsi, and Bud Light. Omnicom’s unit was also reported to have struck an ad deal worth $230 million with Twitter Inc. (TWTR) at the end of last month that will integrate Omnicom’s automated advertising arm Accuen with Twitter’s mobile ad exchange MoPub.

First quarter results beat estimates

Omnicom’s 1Q14 results beat estimates as worldwide revenue increased 3% to $3.50 billion, and U.S. revenue increased 4% to $1.86 billion. Net income for the 1Q14 increased $0.4 million, or 0.2%, to $205.5 million from $205.1 million in the 1Q13. Diluted net income per common share in the first quarter was $0.77 per share versus $0.76 per share during the 1Q13. Omnicom said organic revenue increased 4.8% in North America, 2.3% in Europe, 5.7% in Asia Pacific, 7.4% in Latin America, and 6.6% in Africa and the Middle East.

Omnicom hikes dividend by 25% and resumes buyback

In May, the company raised its quarterly cash dividend by 25%, from 40 cents to 50 cents per outstanding share. With the termination of the merger with Publicis, Omnicom said it will resume its buyback program and buy shares worth $1 billion.

U.S. media ad revenues forecast to increase

Magna Global forecasted U.S. media advertising revenues to grow by over 6% this year to $168 billion—an increase from the previous forecast of over 5.5%. The company said drivers for the increase include an improved economic outlook in the U.S. and incremental advertising spend generated by non-recurring 2014 events—Sochi Olympics, mid-term elections, FIFA Soccer World Cup, and communication on health insurance following the implementation of the Affordable Care Act in various states. It further said media owners generated an estimated $158.4 billion in ad sales in 2013 across all core media categories (TV, radio, digital media, print, out-of-home), but that the growth was mostly driven by digital media.

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