Fitch Affirms Omnicom's IDR at 'A-'; Outlook Stable

2008-04-29 00:41:12 -

- Fitch Ratings has affirmed Omnicom Group Inc's long- and short-term Issuer Default Ratings (IDRs) and other outstanding debt ratings as listed below.

Omnicom Group, Inc.

--IDR 'A-';

--Senior unsecured notes 'A-';

--Short-term IDR 'F2'.

Omnicom Finance, Inc.

Omnicom Finance, plc

Omnicom Capital, Inc.

--Bank credit facilities 'A-';

--Commercial paper 'F2'.

Approximately $3 billion in debt is affected by this action. The Rating Outlook is Stable.

Omnicom's ratings continue to reflect the following:

--Its position as a leading global advertising agency holding company

--Its consistent operating performance, supported by solid net new business wins; and

--Its stable credit profile.

These strengths are balanced by risks associated with:

--Further migration of advertising away from traditional, mass-media approaches;

--Event risk associated primarily with potential revisions to financial policies; and

--Risks associated with cyclical fluctuations of advertising expenditures.

Also, while credit metrics have remained relatively stable, the majority of free cash flow has been dedicated toward significant share-repurchase activity. This would be a more meaningful concern if sustained at similar levels while operations and free cash flow were under pressure.

Omnicom's solid creative reputation and its focus on marketing services have allowed Omnicom to maintain strong organic growth relative to its peers, averaging in the high single digits over the past 10 years. Fitch expects Omnicom to be able to sustain these organic growth characteristics above GDP growth over the next several years. This growth, coupled with prudent cost controls, has lead to industry-leading employee utilization (revenue per employee) measures. Revenue stability and cost controls are further demonstrated by the resilience of Omnicom's healthy EBITDA margins through economic cycles, fluctuating modestly between 13%-17% from 1990 through 2007.

Recognizing that the media landscape is changing and fragmenting, Fitch believes that Omnicom is in a good position to participate in the continued migration of advertising dollars toward marketing services and customer relationship management. Omnicom derives more than 50% of its revenue from these services (slightly more than WPP Group plc and substantially more than its other competitors). In addition to its diverse service offering, Omnicom's credit profile benefits from its geographic diversity as the relatively stable and mature U.S. advertising market accounts for about 53% of revenues, Europe slightly more than 30%, and Asia/other regions account for the remainder. Also, the credit profile benefits from Omnicom's diverse client base (the company services approximately 5,000 clients in 100 countries with the top client representing less than 5% of revenue).

Performance in the first quarter was solid. Omnicom had $1.2 billion in net new business wins (AT&T and Anheuser Busch, among others). Total revenue was up 12.5%, driven by 6.4% organic growth and 5.1% currency and some modest acquisition-related growth. Growth was solid across regions with organic growth in the U.S. up 6.7% and international markets up 6%. Growth was also solid by discipline. Traditional media advertising was up over 13%, customer relationship management was up around 15%, public relations up 7% and specialty communications was up almost 6%. While most ad supported media sub-segments are hyper-cyclical and Fitch recognizes that growth should decelerate with economic weakness, ad agencies are likely to out-grow GDP in a U.S. recession and we expect OMC should be able to post positive revenue growth in a U.S. economic downturn.

Omnicom's financial risk profile remained relatively steady over the past year. Omnicom generates meaningful discretionary free cash flow, which was dedicated toward smaller acquisitions ($378.3 million) and share repurchases ($899.7 million) in 2007, while the company's net debt balance remained relatively steady. While Fitch believes management has and will continue to demonstrate conservative financial discipline in regards to investments, acquisitions, and share repurchases, Omnicom's rating is low in the 'A-' category and a material change in the company's posture toward maintaining consistent bondholder protection could impact the rating negatively. Fitch believes that while the event risk associated with financial policy revisions is relatively low (Omnicom's stock price is up around 40% over the past three-and-a-half years, and there are no concentrations of activist shareholders that presently concern Fitch), Fitch notes there is very little room in the rating for a change in financial risk appetite.

In 2007, adjusted debt (using the present value of lease obligations method) to operating EBITDAR measured 2.1 times (x), down slightly from 2.3x in 2006 and straight debt to operating EBITDA was 1.6x in 2007, down from 1.8x in 2006. While recognizing some of its cash represents client cash, Fitch notes Omnicom had approximately $1.8 billion in cash on the balance sheet as of Dec. 31, 2007. Liquidity is also bolstered by $1.2 billion in free cash flow (after dividends) and $2.5 billion in revolver availability at Dec. 31, 2007. Recently announced first quarter liquidity included $900 million in cash and short term securities and $2.5 billion in availability under the credit facility. Stated debt maturities appear limited (see put discussion below), as almost all debt outstanding is represented by convertible debt maturing after 2030. Fitch assigns these hybrid securities to class A (100% debt, no equity) as defined under Fitch's recently updated hybrid securities guidelines (published October 2006). Per Fitch's guidelines, these units are not considered mandatorily convertible units (due to the put features), and the underlying notes rank as senior notes (meaning there is no loss-absorption benefit).

Convertible bondholders do have the option to put the bonds to the company on annual dates. Omnicom has addressed this issue by providing incentive payments to bondholders at those dates to forego their put option. Reductions in the stock price or increases in interest rates can increase the cost of these incentive payments. The bonds could be put to the company if management deems that it is uneconomical to make a payment or if the incentive offered is not sufficient to satisfy the convertible holders. However, Fitch believes it is likely that Omnicom would offer an incentive payment sufficient to deter a put even if it triggered taxes.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site. The issuer did not participate in the rating process other than through the medium of its public disclosure.

Fitch Ratings
Mike Simonton, CFA, 312-368-3138, Chicago
Rolando Larrondo, 212-908-9189, New York
Jamie Rizzo, CFA, 212-908-0548, New York
or
Media Relations:
Brian Bertsch, 212-908-0549, New York