KKR’s corporate PR deal hangs on more bad news
The author is a Reuters Breakingviews columnist. The opinions expressed are her own. Updates to add graphic.
By Karen Kwok
LONDON, Aug 7 (Reuters Breakingviews) -In the midst of every crisis, lies great opportunity. KKR’s KKR.N latest deal seems inspired by Albert Einstein’s famous quote. The private equity group has taken control of financial communication firm FGS Global by purchasing WPP’s WPP.L 50% stake. The valuation is rich, but it will pay off if the PR firm grows faster than the market. For that to happen, more CEOs will have to face brand-threatening crises.
With an enterprise value of $1.7 billion, the deal announced on Wednesday values FGS at 15 times the EBITDA expected for this year, a person familiar with the matter told Breakingviews. That’s below the 17 times multiple commanded by peer FTI Consulting FCN.N but more than double the 6 times multiple of FGS’s original owner, advertising group WPP. It is also roughly in line with the valuation KKR paid in 2023 for its initial 30% stake.
FGS is growing fast as business leaders increasingly look for its advisers to smooth-talk their way out of corporate messes. The firm’s crisis-management division, which makes up of 35% of total revenues, is expected to enjoy a double-digit top-line growth, a person familiar with the matter told Breakingviews. That's much faster than the 4% growth of the broader consulting market, per IBISWorld data. And even in a year when M&A deals and initial public offerings have been scarce, the financial markets advisory business, which makes up one-fourth of total revenues, grew 9% last year.
The positive spin is that KKR can probably extract some juicy returns for itself and over 500 employees who own about 26% of the company. If FGS can grow EBITDA at 11% annually — in line with FTI — in the next five years and assuming debt of 3 times EBITDA and interest costs of 5%, the buyout group could generate a 16% internal rate of return if it manages to sell the business for a 15 times multiple.
The unpredictability of crises and other corporate events makes revenue from consulting and advisory services lumpy. FTI, for example, grew revenues by 15% last year, but analysts’ estimates compiled by LSEG suggest they will grow below 8% annually over the next three years. KKR could also increase FGS's market share in the advisory business by doing more acquisitions or raising its fees, but the latter could potentially drive corporate clients away.
In the ideal world often portrayed by corporate spin doctors, KKR faces a smooth pathway to a lucrative exit. In the real world of cut-and-thrush corporate jostling, though, the private equity group’s bet hinges on more bad news for FGS’ clients.
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CONTEXT NEWS
British advertising group WPP is selling its controlling stake in financial PR agency FGS Global to minority shareholder KKR for $775 million in cash, which it will use to reduce debt, the company said on Aug. 7.
The sale of the roughly 50% stake gives FGS Global an enterprise value of $1.7 billion, WPP said. The deal will increase KKR's stake in FGS Global to about 80% from 30%. The private equity firm acquired about 30% of FGS Global in 2023. That deal valued the PR firm at $1.5 billion.
WPP, the owner of agencies Ogilvy and GroupM, announced the deal on Aug. 7 alongside first-half results that showed another slowdown in underlying revenue growth and a downgrade in its full-year expectations.
Shares of WPP were down 1.2% at 0814 GMT on Aug. 7.
FTI Consulting's revenue growth https://reut.rs/3YApnxf
Editing by Francesco Guerrera and Streisand Neto
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