Falling shares of S4 Capital mean Sir Martin Sorrell is in crisis | Nils Pratley

IIt was “unacceptable and embarrassing”, said Sir Martin Sorrell in May, when advertising firm S4 Capital finally announced its figures for the year 2021, that publication had been delayed twice. He could hardly say anything else. S4 is its fast and furious comeback vehicle after the WPP and it had just scared investors off about its ability to handle rapid growth – 29 agencies bought since its launch in 2018.

Still, on the bright side, the 2021 numbers didn’t contain any villains. Generating £687m in revenue, the company nearly doubled in size in its third full year. The financial operation would be “upgraded,” Sorrell said. The long-term goal of building a major global digital advertising agency was intact.

And now this: a resounding earnings warning on Thursday that sent the stock price down 46%. Growth still isn’t the issue, but controlling overhead is. The statement cites “significant investment in hiring and consequent expansion of the cost base” as the reason turnover profit for this year is now expected to be £120m, down from £160m. sterling expected by the market.

The difference may not seem huge but, after the debacle with last year’s lagging numbers, S4 was running out of credit with the outside world. At 121p, the share price is now almost back to where S4 started. As of September 2021 it was 800p and S4 was worth £4.5bn, prompting some observers to wonder if WPP (value: £9.3bn) could possibly be overtaken .

Forget the comparisons with WPP. The question now is how the stock price crash hurts the roll-up strategy. Given that Sorrell has already ruled out issuing equity below 425p, making deals is probably off the table. Additionally, past equity deals with digital native founders who have jumped on the S4 wagon may become more costly to satisfy. The whole “co-ownership” setup works best when stocks are floating gently up.

Sorrell himself will have no shortage of motivation to restore market confidence in the grand adventure. He and his deputy Scott Spirit have a five-year incentive program that would pay them 15% of the market value created from the launch of S4, subject to a hurdle of 6% per year.

At the top of 800p, the potential price tag was estimated at £500m for the duo. After the stock plunge, the number is likely zero, a result Sorrell might also call unacceptable and embarrassing. He has a crisis on his hands.

Markets could test ECB dithering

The Bank of England takes a swipe at being late to start raising rates to fight inflation but, compared to the European Central Bank, it has almost skipped the step. One can take the ECB’s half-point increase on Thursday – double the quarter-point promised only last month by its president, Christine Lagarde – as an admission that the process should have started earlier.

We understand the reasons, of course: the fear of recession, aggravated by the threat to energy security following the invasion of Ukraine by Russia. Even so, the hike only brings the deposit rate down to zero, which is hard to reconcile with Eurozone inflation at 8.6%.

Now a new threat has arrived in the form of a spike in bond yields, and therefore borrowing costs, for a few financially weaker members of the euro zone. Italy, now without Mario Draghi as prime minister, tops the list – its yields are 2.3 percentage points higher than Germany’s. The spread is uncomfortably wide, but is it wide enough to induce Largarde to pull out the ECB’s new bond-buying weapon, the “transmission protection instrument”?

As usual, the precise circumstances of the activation remained deliberately ambiguous; market moves should be “unwarranted” and “disorderly,” which could mean anything.

In previous episodes of the euro zone debt crisis, the markets did not wait long to test the ECB’s true intentions. It’s hard to see why this time would be any different when the central bank has been undecided in its primary task of setting interest rates.

M&S winger hits ejection

Marks & Spencer’s new top three would be “flying in formation”, chairman Archie Norman said in March. Not for long, they won’t be. Rather than reach for the sky, winger Eoin Tonge, aka Chief Financial Officer and Chief Strategy Officer, pressed the eject button. He went to AB Foods, which owns Primark and various sugar, ingredient and agricultural companies.

As a career move, it’s understandable: ABF, worth £13.3bn, is a relative jumbo jet compared to M&S’s £2.8bn. But the overview of M&S depends more than ever on the harmonious relationship between Stuart Machin and Katie Bickerstaffe, the two CEOs. To put it mildly, other companies have found double act training difficult to maintain.

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