Original Source: FD (FAIR DISCLOSURE) WIRE
MARTIN SORRELL, GROUP CHIEF EXECUTIVE, WPP GROUP: We should have Steve Felsher over there; we should have Ed Meyer. Ed Meyer was talking to employees in at Grey in New York. It was a scheduled meeting and it happened to coincide with a get-together they were having this morning in New York. So Paul will be there with also with Matt Shetlick (ph) who worked on the deal with Paul in New York. So those are the people. I think what I will do if everybody, if the powers to be are happy, I will kick off, all right? I'll kick off, and just one thing, Paul. Hopefully you can hear me. I will act as your slide pusher for the presentation. Investor information you don't want me to read that, so that is on the front.
We've got four sections for this presentation on Grey. Firstly a transaction overview. Secondly, a strategic rationale section on strategy; thirdly, we are going to illustrate the financial impact of the deal, and Paul will cover that. I will cover the first two, and then we will come back here hopefully for some closing remarks. So on the overview, we believe that Grey represents a highly complementary strategic fit, it has a very strong client roster which includes Procter & Gamble which is the world's largest advertiser with I think spending around the 4.5 billion to $5 billion mark. And just to say P&G interestingly does not work above the line with any of the top three groups.
It's principal other agency is Privlecis (ph) which is number four, so neither Omnicom or IPG or WPP currently (indiscernible)work for P&G above the line. We do have a relationship with P&G below the line in a number of areas. In addition to P&G, 3M and (indiscernible) BellSouth, Boehringer Ingelheim, which is itself in the middle of a consolidation. ConAgra, Hasbro, J.P. Morgan, Chase, Mars and Warner Brothers. Those are clients that we have relationships with, but represent really new opportunities for us in the segments of our business, EG (ph) P&G above the line.
The second point is we will have we believe as a result of this transaction a strengthened relationship with many of our major multinational clients. These are existing clients that we operate with in advertising for example, or in below the line, and there is a complementary relationship with Grey. BAT, Diageo, GSK, Nokia and Pfizer, Pfizer and Pharmacia but of course Pharmacia is being consolidated into Pfizer.
The third point is that we believe that Grey has strong brands in advertising, a very strong brand in media investment management in the guise of or in the form of MediaCom. A very strong healthcare business which I just got an email before we came here to, from (indiscernible) celebrating the partnership with a big healthcare win today actually. Direct and interactive strong, we will come onto that in a minute, very strong direct and interactive business, Internet business, and then other businesses in sales promotion and public relations.
We believe as a result of the transaction we will have enhanced long-term growth prospects, and I would emphasize the word long-term. Often in these and some of the comments that we have seen historically on this in the last two or three months has been I think focused maybe too much on the short-term. As a shareholder in WPP I would say that WPP is a stronger company with Grey than without Grey if you look at the long term, if you look at client patents, if you look at functional strengths and geographic strengths. It has long-term growth prospects and a significant increase in the groups talent resources; there are 10,000 people in Grey and a lot of very talented people. So (indiscernible)headcount of the group will be about 60,000 people and if you include associates it will be 80,000.
And significant opportunities, we know for cash flow and margin enhancement, gross margins, historically have been around 5 or 6 percent; they are running at the moment we think this year they will be about 8 to 8.5 percent, we will come onto that when it goes into the financial part of the presentation. The transaction will be accretive to earnings in 2005 with additional accretion in 2006 and 2007. And in terms of probably even more important calculation that is return on investment or return on average cost of capital we believe that we will more than cover our cost of capital by 2007 on the basis of the assumptions that we present today.
So some of you may regard those as being optimistic, some of you may regard them as being conservative, so you make your calculations on that basis. A few comments on the key terms you have it in the press release. You've seen it commented on in the wire services this morning. The offer value in equity terms is $1.52 billion and that is based on 1.512 million fully diluted Grey shares. That is comprising 50 percent cash, $760 million in cash and $760 million in (indiscernible) WPP shares, half and half, and that is based on a closing cost on Friday night of WPP at 514 per share and represents a fixed exchange ratio. Shareholders will have the option of asking for more cash or more shares and obviously we will move up and down what is paid to each shareholder on that basis. But the overall limit is 50-50.
Now this represents an enterprise value of slightly lower figure of $1.309 billion, which takes into account cash balances on the balance sheet at June 30th, June 30th balance sheet at $172 million and option proceeds of $39 million. So enterprise value of 1.3 billion and the consideration represents on a per-share basis $1005 per Grey share. The cash consideration will be funded from WPP's existing resources, and as a result of the transaction gray shareholders will own approximately 6.5 percent of the enlarged WPP. This represents a tax-free transaction to Grey shareholders, to U.S. shareholders, given the 50-50 mix of stock and cash and we expect closing toward the end of the year, December of 2004 or January of 2005.
On management, slide 7, Ed Meyer has entered into a new employment contract for 2005 and 2006. He will continue as Chairman and CEO of Grey Global Group. That is the parent company of the Grey unit, so they will come on too in a minute. And of course he will assist with us, starts on the integration of Grey into WPP. And he will be offered a position on the Board of WPP in due course when an appointment has been made to the chairmanship and CEO-ship of Grey Advertising, which is one of the bigger units in Grey Global Group.
Steve Felsher who is the Chief Financial Officer of Grey Global has been immensely helpful and responsive in our due diligence and negotiation and other senior management of Grey will continue under their existing contract arrangements. As far as incentive renumeration is concerned, the current Grey equity incentive programs will remain subject to the existing vesting schedules. So if they have vesting schedules or incentives or bonuses they received historically, they will remain in place. They will effectively be rolled over. And the same thing applies in time to our existing incentive program but that will be transitioned to WPP's incentives as appropriate in the future.
As far as integration is concerned, it's probably a misnomer, a misleading word. There is very little integration that will take place. We will keep Grey Global Group as I indicated as a unit. The operating companies within that unit which I'll come onto in a minute will remain separate, will continue to report to the CEO of Grey. That is Ed. And MediaCom, which is one of the constituent parts, will explore opportunities to leverage in the media buying efficiencies that are clearly available through GroupM. So the management of MediaCom Alexander Schmidt-Vogel will explore whether (indiscernible) what can be done to leverage our considerable media buying power as a result of this transaction.
I know we do not reveal the revenues of our media operations but I will destroy the habit of a lifetime by giving you the figure, it is about $900 million is in our media investment management operation. MediaCom's investment, MediaCom's investment management revenues were about 300 million, so the combined revenues of the, all our media units excluding K. R. Media which is just starting, so that is Maxus, MediaEdge CIA, MindShare and MediaCom will be 1.2 billion which will place us in a very profitable position. Now that is revenues. That is not billings, and you can refer to RECMA for rate card I think it is, for analysis of Media.
The public company reporting responsibilities obviously will be integrated into WPP and there will be some savings there. And there will be some opportunities with the IT infrastructure and property portfolios that's integrated across the business. So that is a little but of a background. As far as strategic rationale is concerned, we believe that Grey Global represents a number of very strong business units within an integrated group. You can see here several of the units, not all of them, several of the units that Ed in hi presentations historically has emphasized. Grey Worldwide which is the advertising agency, MediaCom, the media planning and buying business I just mentioned, a very strong direct and interactive business, Grey Interactive and G2. G2 is the agency that handles the bulk of the BAT business for example, which Ogilvy now with one for one handles on the WPP side of the fence.
GCI, a strong public relations business with a good position in the marketplace and then Grey Healthcare Group. Now Grey Worldwide as an advertising agency is ranked about seven; some of this (indiscernible) historically because of the Sarbanes-Oxley limitations that we put ourselves under. MediaCom is number 9. There is no ranking for direct or GCI currently of any substance available. And then as far as healthcare for media news, Grey Healthcare is number five, and you can see some strong clients some of which are shared across the group. For example GSK, you see is in four out of the five divisions on (indiscernible) on the client list.
In terms of complementarily to WPP and our leading brands, you see in advertising Grey Worldwide will line up against our existing brands of Thompson, Landor, Ogilvy and Red Cell in media investment management as were already mentioned, MediaCom, MindShare, and MediaEdge CIA and we have Maxus, as well which we are developing. In Public Relations or public affairs GCI against our brands there. And in branding and identity healthcare and specialist communications, the healthcare group Grey Interactive, Grey Direct and G2.
In terms of clients, obviously the new relationships with major advertisers -- when I say new relationships we do tend to have relationships with most of these people but in new areas obviously it is P&G, 3M, J.P. Morgan, Chase and Warner Brothers. Common clients in existing areas or in areas that we both operate in GSK, BAT, Nokia, Pfizer and Diageo. And obviously just going back one -- I guess I can go back one -- if you look at in terms of direct G2 GI gives us an interesting opportunity to manage conflict in the direct. You remember that we have two very strong global direct interactive Internet businesses, Wunderman and OgilvyOne, and that is obviously one of the heavy growth areas and we see Grey's direct operations as being of significance in that.
In terms of geographical split, interestingly our Grey's business is slightly bigger in Europe than North America. It runs roughly 45, 45, 10 …