When Sir Martin Sorrell launched S4 Capital in 2019, he promised clients a “faster, better and cheaper” digital advertising business.
Promising to overhaul the old ad agency model and with an unrivaled book of contacts, the former WPP executive embarked on an aggressive growth plan, snapping up small businesses and bringing in big-name clients. Its early success saw the business valued at £5bn.
However, S4 quickly collapsed after problems with its accounting emerged last year, forcing it to delay publishing its accounts.
Investors hoped it was just a glitch caused by breakneck growth. But deeper problems have emerged in recent months.
Last week S4 issued its second profit warning in just three months and announced a round of job cuts. The stock is now down 60% from its peak and is near a record low.
“There's a trend here of slightly overly optimistic budgeting and forecasts that they can't meet, and I think investors are quite concerned about that,” says media analyst Alex DeGroote.
More fundamentally, analysts have begun wondering whether Sir Martin's company really offers anything new, and wondering what the future prospects are for a business that has relied heavily on the Rolodex of its 78-year-old founder.
“S4 should have been different. It had to be agile and agile,” DeGroote says. “But it didn't really work.”
For many industry observers, S4 Capital has always been a vendetta against Sir Martin as he looks to maintain his status as a doyen of the advertising industry after his abrupt exit from WPP.
Although the advertising tycoon promised more Using a flexible, digital-first approach, he largely followed the same pattern of growth through acquisitions that he used to create WPP.
Sir Martin also used his reputation and connections to attract big tech clients, which became the cornerstone of S4.
S4 Capital share price
The agency counts Facebook, Amazon and Google among its biggest clients and has outlined goals to attract more “huge » customers – customers who spend more than $20 million (£16.3 million) a year with the company.
Since recently. , Sir Martin announced the opportunities offered by artificial intelligence (AI). He added the word “more” to the end of the S4 slogan “faster, better, cheaper”, hinting at the potential of AI to speed up campaigns.
But behind the tech hype, the numbers tell a different story. S4 is facing a downturn in the technology sector, driven by rising interest rates.
Ian Whittaker, a media analyst, says: “The problem is that many of the clients he was targeting, like you, As interest rates rise, they suddenly change strategy.
“I think that combined with one or two of its biggest clients cutting costs, that had a disproportionate impact on the numbers.”
The latest profit warnings are a fresh blow to what Jefferies analysts call “already fragile market confidence” in S4.
This could be attributed to a series of accounting errors that have forced the company to delay results twice in the past year. The saga has caused S4's share price to plummet, with its market value now down to £415 million from a peak of around £5 billion.
Sir Martin said the company was taking a “disciplined” approach. and back to basics. But there is a sense in the City that the ad boss is now paying the price for his aggressive growth strategy.
DeGroot says underlying investor confidence in the company “started to wane some time ago.”
“This there was a growth-at-all-costs approach, the impression of a kind of frantic growth, Sorrell was obviously a man in a hurry, given that he was about 70 years old,” he says.
There are also concerns about the company's growing debt levels, which are forecast to almost double to £220 million. until the end of the year through additional payments for previous acquisitions.
Sir Martin said he was comfortable with this amount of leverage, saying there would be no further payments next year. But after the latest data, investors may be concerned that S4 may be forced to embark on an emergency fundraise to strengthen its balance sheet.
The fall in share prices threatens to block future deals given Sir Martin's penchant for funding acquisitions through 50:50 cash and share deals. This raises questions about how S4 can regain investor confidence and return to growth. This threatens to turn into a vicious circle.
“If you do a deal that's 50% equity and 50% cash, and your stock price goes down, people won't do the deal,” Whittaker says. “You'll have to give away a lot more shares, you'll have to change the proportions, and so the long-term story for many investors just won't be as attractive.”
Sir Martin admits S4 needs to improve its profits and efficiency, but he's hitting back by what he calls a tendency to “sensationalize” company problems.
“Look at the customer list, look at the core customer growth, look at the margins, look at the EBITDA, and then cut out the noise,” he says. “Skip the nonsense and focus on what matters.”
S4's 20 largest customers increased spending by 9% in the first half of the year. Profit margin was 8.2% in the first half, while EBITDA was down 30% on a like-for-like basis to £36.5m. Sir Martin admitted they were both “not as good as we wanted them to be.” p>
For some, however, this will not be enough to convince investors that S4's offering truly differentiates it from other agencies.
“The narrative around S4 was, 'We're different because we're digital, and we're not going to be subject to any broader structural pressures than the ad industry as a whole,'” DeGroote says. “This is complete nonsense.”
Analysts and investors will also be wondering what the future of S4 looks like without Sir Martin at the helm.
In S4, Sir Martin followed a similar acquisition-driven growth playbook to the one he used to create WPP. Photo: Marina Imperia
Earlier this year, the 78-year-old revealed he was undergoing chemotherapy following surgery to remove a cancerous tumor. .
Industry sources who work with Sir Martin say his energy and dedication to the business has “not waned at all”. However, it is a reminder that the tycoon will not rule forever.
In its latest annual report, published in the summer, S4 admitted that the market views S4's success as “inextricably linked” to its founder, adding that the company is working on a succession plan.
Industry insiders say there is a story behind Sir Martin has a strong leadership team behind him, pointing to internal figures such as Scott Spirit, S4's chief development officer and former WPP lieutenant, as possible candidates to succeed the boss.
But the advertising mogul's reputation means S4 could have its operation ceased when it was replaced. There are few like him. As Moray McLennan, the retiring chief executive of rival M&C Saatchi, put it: “Sir Martin is a formidable, entrepreneurial leader with a distinguished record of success.”
Devolution of power can also lead to loss of power. The company is open to sale or division of business. For now, industry observers say Sir Martin will focus on restoring market confidence and is unlikely to leave.
“He's incredibly astute, he still has a Rolodex to die for,” DeGroote says. “Therefore, I would not refuse to resurrect him.”