When Sir Martin Sorrell launched S4 Capital in 2019, he promised clients a “faster, better, cheaper” digital advertising business.
With a vow to overhaul the old ad agency model and an unrivalled contacts book, the former WPP boss embarked on an aggressive growth plan, snapping up smaller businesses and winning big-name clients. His early success catapulted the business to a valuation of £5bn.
Yet S4 quickly came unstuck after problems with its accounting emerged last year, forcing it to delay the publication of its accounts.
Investors had hoped it was simply a hiccup caused by breakneck growth. But in recent months, deeper issues have emerged.
Last week, S4 issued its second profit warning in just three months and announced a round of job cuts. Shares are now down 60pc from their peak and close to record lows.
“There is a pattern here of slightly over-optimistic budgeting and forecasts which they can’t deliver on, and I think investors are quite troubled by that,” says media analyst Alex DeGroote
More fundamentally, analysts have begun to question whether Sir Martin’s company is really offering anything new and ask where the future prospects lie for a business that has largely hinged on the Rolodex of its 78-year-old founder.
“S4 was supposed to be different. It was supposed to be agile, nimble,” says DeGroote. “But that hasn’t really played out.”
For many industry watchers, S4 Capital has always been a revenge play for Sir Martin as he looks to retain his status as doyen of the advertising industry following an acrimonious exit from WPP.
While the ad tycoon promised a more agile, digitally focused approach, he has largely followed the same playbook of growth through acquisition that he used to build up WPP.
Sir Martin has also used his reputation and connections to land major tech clients that became the cornerstones of S4.
The agency counts Facebook, Amazon and Google among its biggest clients and has outlined aims to target more “whoppers” – clients who spend more than $20m (£16.3m) a year with the company.
More recently, Sir Martin has heralded the opportunities offered by artificial intelligence (AI). He has tacked the word “more” onto the end of S4’s “faster, better, cheaper” tagline in a nod to the potential for AI to supercharge campaigns.
But behind the tech spiel, the numbers tell a different story. S4 is being burned by a downturn in the tech sector prompted by rising interest rates.
Ian Whittaker, a media analyst, says: “The problem is that many of the clients he was going for, as you had the rise in interest rates, they suddenly change strategies.
“I think that combined with perhaps one or two of his biggest clients pulling back spend, that’s had a disproportionate impact on the numbers.”
The latest profit warnings are a fresh blow to what analysts at Jefferies describe as an “already fragile market confidence” in S4.
This can be traced back to a series of accounting blunders that forced the company to delay its results twice last year. The saga sparked a sharp fall in S4’s share price, with its market value now languishing at £415m, down from a peak of around £5bn.
Sir Martin has said the company is taking a “disciplined” approach and going back to basics. But in the City, there is a feeling that the ad boss is now paying the price for his aggressive growth strategy.
DeGroote says investors’ underlying confidence in the company “started to erode some time ago”.
“It was a growth-at-all-costs approach, the impression of sort of frenzied growth, Sorrell obviously being a man in a hurry given he was in his mid-to-late 70s,” he says.
There are also concerns over the company’s ballooning debt pile, which is forecast to almost double to as much as £220m by the end of the year due to extra payments for previous acquisitions.
Sir Martin has said he is comfortable with this amount of leverage, saying there will be no further payments next year. But after the latest figures, investors may be concerned that S4 could be forced into emergency fundraising to shore up its balance sheet.
The share price slump threatens to block future dealmaking, given Sir Martin’s propensity to finance acquisitions through 50:50 cash and share deals. This raises questions about how S4 can regain investor confidence and return to growth. It threatens to become a vicious cycle.
“If you’re doing deals that are 50pc equity and 50pc cash and your share price is down, people won’t do the deal,” says Whittaker. “You’ve got to give away a lot more equity, you’ve got to change proportions, and so the long-term story to many investors just doesn’t become as attractive.”
Sir Martin admits S4 must improve its margins and efficiency but hits back at what he describes as a tendency to “sensationalise” the company’s troubles.
“Look at the client list, look at the growth in the major clients, look at the margins, look at the ebitda and then eliminate the noise,” he says. “Cut out the crap and just focus on the basics.”
S4’s top 20 clients increased spending by 9pc in the first half of the year. Profit margin stood at 8.2pc in the first half of the year, while ebitda was down 30pc on a like-for-like basis at £36.5m. Sir Martin admitted they were both “not as good as we want”.
For some, however, this will not be enough to convince investors that S4’s offering truly sets it apart from other agencies.
“The narrative around S4 has been: ‘We are different because we are digital and we will not be exposed to the wider structural pressures that the wider advertising industry’,” says DeGroote. “That’s total BS.”
Analysts and investors will also be questioning what S4’s future looks like without Sir Martin at the helm.
Earlier this year, the 78-year-old revealed he was undergoing chemotherapy after surgery to remove a malignant tumour.
Industry sources who work with Sir Martin say his energy and commitment to the business are “completely undiminished”. Nevertheless, it is a reminder that the tycoon will not be in charge forever.
In its latest annual report published over the summer, S4 acknowledged that the market viewed S4’s success as “intrinsically linked” to its founder, adding that it was working on a succession plan.
Industry insiders say there is a strong leadership team behind Sir Martin, pointing to internal figures such as Scott Spirit, S4’s chief growth officer and a former WPP lieutenant, as possible candidates to succeed the boss.
But the ad tycoon’s reputation means S4 may have its work cut out in replacing him. There are few like him. As Moray MacLennan, outgoing chief executive of rival M&C Saatchi, puts it: “Sir Martin is a formidable, entrepreneurial leader with an extraordinary track record of success.”
A handover of power may also leave the company open to a sale or break-up of the business. For now, industry watchers say Sir Martin will be focused on restoring market confidence and is unlikely to walk away.
“He’s incredibly shrewd, he’s still got a Rolodex to die for,” says DeGroote. “So I wouldn’t put it past him to resurrect this.”