by Herman Manson (@marklives) The South African ad industry has recently seen a series of takeovers and mergers of high-profile independent agencies by global communications networks — WPP and Publicis, specifically — thanks to accelerated interest in the African comms landscape and a cheap rand. Some independents are worried by the Competition Commission’s seeming lack of concern regarding this acquisition spree and the increased local-market dominance.

Concerns by independents include:

  • Higher-than-industry-average salaries for key talent, against which independents often cannot compete.
  • Discounts through bulk-buying on the media side — media discounts through scale, preferential payment terms and discounts with preferred suppliers. These all cut into the profitability and sustainability of the various agencies.
  • Leveraging international relationships with global parent companies of SA holdings to manipulate whom ends up on pitch lists.

MAC Charter: 51% local ownership

Odette van der Haar, CEO of the self-regulating SA industry body, the Association for Communication and Advertising (ACA), says that its charter for transformation — the Marketing, Advertising and Communication (MAC) South Africa Charter — encourages and rewards local ownership of agencies.

“With our Charter in place, the Competition Commission has nothing to worry about,” contends Van der Haar. “The targets of our scorecard are far more stringent than the generic scorecard and, in fact, our revised scorecard — which is to be promulgated under section 9 and written into law — requires 51% local ownership of companies in our sector, which will ensure a truly SA advertising and communications sector.”

In essence the regulations, which the ACA says is currently sitting before the relevant ministry and could be enacted at any time, will require all advertising agencies in SA to be 51% locally owned by 2121. A series of timelines and milestones will be set between the enactment of the legislation and 2021, which agencies would be required to meet.

How global networks structure their local offices to meet the new ownership criteria is not something the ACA is willing to speculate on. It would however impact on their ability to consolidate financials.

More deals in the pipeline

Both WPP and Publicis, two of the largest international holding companies, have been actively acquiring agency properties in the country over the past few months, with more deals in the pipeline.

Last month, Publicis Groupe (head-quartered in Paris, France) acquired BrandsRock, which it merged with Saatchi & Saatchi to form Saatchi & Saatchi Brandsrock.

WPP Group logoPublicis Groupe also recently acquired OwenKessel (merging it with Leo Burnett) plus digital agency Lighthouse Digital (which has become part of Publicis division Starcom MediaVest Group). In December 2013, Publicis bought out digital agency Synergize to sit within Saatchi & Saatchi South Africa.

WPP, meanwhile, bought into Cerebra and Native. WPP operating company JWT acquired a majority stake in Durban-based The Hardy Boys; WPP announced that its wholly-owned operating company Grey had acquired a majority stake in The Volcano Group; and the same British multinational advertising and PR company also took a controlling stake in Quirk.

Revenues of around US$500 million

In a recent media statement, WPP revealed that it (including its associates) generates revenues of around US$500 million and employs around 4000 people in South Africa.

Publicis Groupe logoHardin Ratshisusu, manager for mergers and acquisitions at the Competition Commission, says the advertising, marketing and communications sector is not one of the commission’s priority sectors for proactive investigations; as such, there is no specific focus on this industry.

“However, with respect to merger regulation, every merger that falls to be notified with the Competition Commission is assessed on the basis of the likely competition and public interest effects it may have in the affected market(s),” says Ratshisusu.

“As such, irrespective of the industry, the Competition Commission prioritises all mergers that are notified.”

“A multi-billion rand industry”

“We are a multi-billion rand industry in terms of spend,” says Mike Abel, chief executive partner of M&C Saatchi Abel. “I would therefore imagine the Competition Commission would have a high-level view on what they believe is an acceptable level of ownership and control by any one group in our industry. If not, what level turnover or spend is required for an industry to be considered important enough for them?

“And then what percentage of ownership would they be comfortable with for any particular group to own of that sector? …Independents, such as ourselves, would see no downside in having clear and established levels of ownership to potentially curtail monopolistic behaviour in any aspect of our industry.”

Industry commentator, Chris Moerdyk, suspects that the reason the Competition Commission has not placed the ad industry anywhere near the top of its priorities is because it is an extremely difficult issue on which to come to any conclusive and objective finding:

“Decisions not made in SA”

“The biggest competition issue would be the handling of major accounts and, more often that not, these decisions are not made in SA or decided in SA but by the parent companies which, for example, pick up major global accounts and simply inform their SA subsidiaries that they have to handle the local business or give up other accounts,” he says.

“The issue that would confuse any Competition Commission findings is the fact that government might in many cases regard the ownership of SA agencies by foreign conglomerates as foreign investment while, at the same time, these massive mergers and acquisitions could be seen as very detrimental to smaller non-aligned ad agencies,” Moerdyk continues.

“I don’t believe that it would be possible for the Competition Commission to try and regulate the local ad industry — it would be a no-win exercise because, whatever the outcome, there would be howls of anguish from abroad and at home. Quite apart from which, trying to suggest that a decision made in London or New York is in conflict with South African advertising legislation would simply kill off a lot of major players.”

Often a sign of growth and economic activity

Alistair Mokoena, managing director of FCB Joburg, takes a similar view, saying merger-and-acquisition activity in any industry is often a sign of growth and economic activity, and notes the cyclical expansion and contraction all industries go through: “In the advertising industry, there has been a fair amount of mergers and acquisitions in recent times which were preceded by an expansion or explosion of small independent agencies.”

Still, Mokoena would favour additional checks and balances in the form of scrutiny by the competition authorities — not because he thinks there are problems in the industry, but because it is in everybody’s interests that large mergers and acquisitions do not result in competition or public-interest problems.

No clear view

Forming a clear and transparent view of SA’s agency landscape is a complicated issue. Many ad agencies don’t reveal SA revenue figures (although listed groups such as WPP might reveal aggregated figures for the region or the network, often they don’t break down revenue by agency brands). AdReview and AdFocus both publish annual charts that contain revenue bands and try to answer the question of which agencies are the biggest revenue spinners.

Most agencies are willing to reveal publicly approximate revenue bands for their businesses; this makes for inexact science but gives an indication of where agencies are in terms of revenue.

PwC estimates that R34,46 billion was spent on advertising in SA in 2013, with that number rising to more than R37 billion in 2014. The ACA estimates that the industry generates approximately R42 billion per annum to the country’s GDP.

Calculating revenue

Even calculating revenue can be difficult as different agencies take different views on what constitutes revenue and what should be included in this figure. (MarkLives encourages agencies to report revenue as opposed to billings: Billings is the amount of client money that flows through an agency to media, production houses and the like — what you can touch but you can’t keep = billings. Revenue is the money agencies get to keep. This is the number we are looking for.)

Agencies listed below are included based upon publicly available revenue bands in 2013 (sourced from places such as AdFocus and AdReview). Revenue bands for agency brands listed with an asterisk (*) were confirmed individually with agency management. It gives a relative overview of the dominant positions international holding companies enjoy in the SA agency landscape. (The information provided by agencies is impossible to audit and MarkLives accepts such information in good faith.)

R150–220+ million revenue band

Agency name Group
*FCB Joburg IPG
*Ogilvy & Mather Johannesburg WPP
*Aqua Group WPP
*The Creative Counsel independent

R125–150 million revenue band

Ogilvy & Mather Cape Town WPP
*JWT South Africa WPP
*Y&R Johannesburg WPP
Havas Worldwide Havas
*Native VML WPP

R100–125 million revenue band

*Volcano/Grey South Africa WPP
*TBWA\Hunt\Lascaris Johannesburg Omnicom
*Joe Public independent
*M&C Saatchi Abel M&C Saatchi
Quirk WPP
*The Jupiter Drawing Room Johannesburg WPP

R70–100 million revenue band

*DDB South Africa Omnicom
*Gloo Kagiso
*The Jupiter Drawing Room Cape Town WPP owns 49%
*TBWA\Hunt\Lascaris Durban Omnicom
*Ireland/Davenport WPP
MetropolitanRepublic WPP
 *FoxP2 Group independent
*King James Group independent
* Lowe + Partners IPG

R50–70 million revenue band

*Mortimer Harvey independent
*Saatchi & Saatchi Brandsrock Publicis
*Net#work BBDO Omnicom
*Hamiltons Advertising independent
*99c independent
*The Hardy Boys WPP

R30–50 million revenue band

*34 independent
*BlackRiver FC WPP
*140 BBDO Omnicom
*OwenKessel Leo Burnett Publicis

 Note: figures are for 2013.

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