Arun Sudhaman 09 Apr 2010 // 2:01PM GMT
This is something that other agencies would do well to watch closely. BlueFocus Consulting is China's biggest independent PR firm and, after fruitless attempts to sell the agency, it has listed on the Shenzhen Stock Exchange. A few years ago, I covered a bidding war for the firm which eventually resulted in Huntsworth Group agreeing a price of, according to sources, as much as $20m for the agency. Eventually, the deal fell apart because of a cultural mismatch that was hardly unexpected. Soon after that, BlueFocus CEO Oscar Zhao told me his firm was considering a stock market listing. I filed that away as a nice idea, but didn't think it would happen, primarily because individual agencies rarely seek public funds. It's worth revisiting the reasons why agencies are loathe to list now that BlueFocus has sought an IPO on Shenzhen's ChiNext board. So far, the firm seems to have done pretty well. It's stock is trading well above the initial offering price of 33.86 yuan, and even if volume has dipped, represents a 65x multiple of P/E. For the firm's five founders, that all represents a hefty windfall. BlueFocus has obviously decided that, rather than sell or - as it did in 2008 - continue to seek private equity investment, public funding is the best route to continue expanding the agency. It is not the first time this kind of question has reared its head in agency circles. A couple of years ago, there was plenty of speculation that the world's biggest independent PR firm - Edelman - was considering listing as an alternative to selling. The attractions are obvious. Agencies require investment if they wish to keep growing, and founders are keen to realise value for their efforts. Selling the agency to a listed holding group is the obvious option. But that, in these straitened times, is perhaps not the golden windfall it once was. Why not, then, go public? This article provides some clues. An analyst once told me that capital markets find it difficult to accurately value agency business models, for a few reasons: Scalability Agencies are people-based and much less easier to scale than, for example, manufacturers. Analysts hate this, as it makes it difficult for them to forecast growth. Reliance on clients In the China Daily article above, an analyst voices concern over the fact that about 23% of BlueFocus' earnings comes from one client, Lenovo. That type of situation is not viewed positively by stock markets. So you wonder what analysts would think if Waggener-Edstrom decided to list. Assets Again, being people-based means that an agency's only real assets could walk out the door at any time. Not exactly a formula that inspires confidence in the financial community. It is instructive to look at the experience of David Ketchum's agency, Upstream Asia, which listed on London's AIM market via a reverse takeover. The initial deal provided some useful funds for Upstream to buy out its Australian partner. Ultimately though, Upstream sold out to Next Fifteen's Bite Communications after trading in its shares simply fell away. Which means it will be very interesting to see how BlueFocus progresses and what kind of shareholder value it returns. Independent agencies everywhere should be watching closely.