Ad agency founded by Britain’s ‘Mad Men’ issues profit warning, sending shares plunging 46%

By The editor On Dec 4, 2019

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M&C Saatchi stock plunged on Wednesday after the world’s largest independent ad agency issued a profit warning and revealed a previously disclosed accounting scandal would have a greater impact than previously expected.

The company’s second profit warning in just three months sent shares tumbling 46% to 79p on Wednesday. The stock

SAA, -46.17%

has now fallen more than 72% so far in 2019. Underlying pre-tax profit for the full year will now be up to 27% lower than 2018, the company said, due to higher costs and a weak final quarter.

Chief executive David Kershaw admitted the update made for “very difficult reading” for investors and management.

Britain’s original ‘Mad Men’ Charles and Maurice Saatchi founded the company in 1995 after leaving Saatchi & Saatchi, the advertising giant they founded in 1970, following a dispute with investors.

The brothers, Iraqi immigrants to the U.K., led Saatchi & Saatchi to become the world’s largest ad agency in the 1980s—famous for successful campaigns with British Airways, the cigarette brand Silk Cut and its ‘Labour Isn’t Working’ ad for the British Conservative Party, which propelled Margaret Thatcher into Downing Street in 1979.

The Saatchi’s new venture has also grown through acquisitions and clients into an international advertising giant. Shell

RDSA, +0.14%

Unilever

RDSA, +0.14%

ULVR, -0.09%

UL, +0.24%

and the Premier League soccer tournament are among its biggest clients.

The company issued a profit warning in September, following the discovery of accounting errors and struggles to win new businesses in the first half of the year. The world’s largest advertising companies, including WPP

WPP, +0.57%

and Publicis

PUB, +0.41%,

have been battling with the industry shift towards digital advertising.

M & C Saatchi’s accounting errors—incorrect statements on revenues and costs—first came to light in August and the company decided to take a one-off £6.4 million ($8.39 million) charge to its 2019 results.

Following an independent review by PwC, the hit has increased to £11.6 million, to be spread over its 2018 and 2019 results, the company said on Wednesday. The company’s U.K. business will also undergo a restructuring in a bid to boost performance.

“The trading performance in the second half of this year is disappointing,” said Kershaw. “However our operating businesses remain strong, creative and competitive and we expect that, when combined with the impact of our restructuring coming through, we will have a stronger trading performance in 2020.”

CMC Markets analyst Michael Hewson said the new is about as bad as it gets for Saatchi, “with the sector already under pressure due to the changing dynamics of the digital advertising world on its traditional business model, to score an own goal of this magnitude is excruciating.”

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