Sir Martin's adventure in Africa

What happens when you bring together one of the world’s shrewdest businessmen in the communication business, with his equal in the region, and one of Kenya’s savviest corporate spin-doctors?

Well, you have a combustible mix that is now turning out to be Scangroup, a Kenyan communications business with interests around Africa in advertising, media buying, public relations, consumer research, and event management.
In Sir Martin Sorrell, WPP’s CEO who is considered a legend, Bharat Thakrar, the founder of Scangroup who has built the most extensive agency network in Africa, and Koome Mwambia, the head of Ogilvy East Africa, we have a triumvirate with the ambition of reshaping the way business, NGOs, and governments communicate to the world.

In the past six months, since WPP announced that it was going to consolidate its holdings in sub-Saharan Africa by buying out more shares in Ogilvy East Africa, which it partly owned, and Scangroup, in which it had been the biggest shareholder since 2008, the share price of its Kenyan subsidiary on the Nairobi Stock Exchange has doubled to Ksh55 (68 US cents). Scangroup is now worth $138 million on the stock exchange.

This is the kind of reaction that Sir Martin would have expected to this complicated deal, which initially faced major hurdles from competition regulators in Kenya.
But now, both local shareholders and analysts and major foreign portfolio investors seem to be sprinkling holy water all over the deal.

Indeed, the optimism around Scangroup is such that it is one of the most expensive shares on the NSE, trading at a trailing price to earnings (p/e) multiple of 29. For the share price to remain at this level, the market is saying that they expect future earnings to grow by at least 30 per cent over last year’s level.

So far, the results are encouraging. The benefits of the WPP acquisition of a 27.5 per cent stake in October 2008, which widened Scangroup’s offering, are starting to kick in.

Scangroup’s profits before tax were up 40 per cent to Ksh265.5 million ($3.3 million) for the six months ended in June 2010.

This was as a result of the recovery in the Kenyan economy that saw firms’ billings increasing. The best is yet to come, and this is what investors are betting on.

Three months ago, after Bharti Airtel won the regulatory approval to buy Zain’s African operations, Ogilvy Africa, a division of Scangroup, won the mandate to manage the communications for the Airtel brand across Africa. This business, under Zain, was being managed by Ogilvy East Africa.

The Airtel account, which is estimated to be worth $100 million of advertising spending, could potentially generate nearly $20 million of incremental revenue for Scangroup, going by the industry conventions for agency commission and mark-ups on procurement.

Airtel is likely to drive a hard bargain, but it is also expected that the Indian operator will ratchet up advertising spending as it guns for market share in Kenya and Nigeria.

Scangroup’s other big clients, Safaricom, which is managed by Red Sky, and Essar, which is managed by Blue Print, and Orange/Telkom Kenya, which is handled by Ogilvy Public Relations, are all caught up in a bitter war for market share, which in the communications and media business means good business volumes. Essar’s account is now up for grabs.

Scangroup has other big clients in the consumer goods industry in the food and detergent sectors.
Coca Cola, which is handled by its Universal McCann in 27 African countries, is looking up as African economies start to boom; Procter & Gamble, which is handled by its Mediacom agency, is tripling its efforts to sell more expensive powder soap to an emerging middle class on a continent that is doing just fine with cheap bar soaps.
Proctor & Gamble has awarded a contract to Saatchi & Saatchi worth approximately $2.5 million to support the East and West African launch of Ariel, P&G’s washing powder brand.

Unilever, yet another client is engaged in a vigorous award-winning campaign to get Africans to wash their hands with its reformulated Lifebuoy bar soaps.

Then there is the $16 million war chest tucked away in Scangroup’s balance sheet, courtesy of the WPP acquisition.

In the next two years, that cash is going to be used to buy up stakes in agencies across the continent to beef up Scangroup’s presence. WPP has bought two other businesses in Africa so far.

“Our objectives are to build our interests in various countries in Africa,” Sir Martin told The
EastAfrican.

“We have no religious preference for controlling or minority shareholding other than that any minority interest should be in excess of 20 per cent so that profitability can be consolidated. We will pursue various models to see what is appropriate in the market.”

The past five years have seen WPP engaged in an ambitious network development in Africa. However, the company continued to look at Africa through South African lenses.

This was a view that distorted the emerging opportunities in sub-Saharan Africa, which South Africa’s developed economy continues to dwarf. Hence the bet on Scangroup.

WPP’s strategy in Africa is to leverage its relationships with global and regional companies as they expand on the continent.

At first, when multinationals merely grafted their global strategies on Africa, it was easy to run the business by remote control from Madison Avenue in New York or from London by sub-contracting to a franchise affiliate.

But this strategy did not pay off well for some clients, who now insist on dedicated, on-the-ground client presence in Africa so that they can tap into homegrown solutions.

Sir Martin says WPP is starting to see situations where clients wants agencies on the ground in Africa pitching together with headquarters for work on the continent.

“Yes, we are starting to see that. Not just Ogilvy... but JWT, Grey, Hill & Knowlton, Burson-Marsteller, TNS-RI, Millward Brown, Wunderman, Brand Union, Fitch, Landor, G2 and others,” says Sir Martin.

He says that big multinational companies such as Coca-Cola, Diageo, Ford, Nestle, Nokia, Procter & Gamble, PepsiCo and Unilever have built substantial and successful businesses in Africa.

“However, I would agree that global strategies cannot be applied mechanically irrespective of local conditions, as Prof Ted Levitt controversially suggested back in 1983,” says Sir Martin, “There are global consumers and there are global categories, but we estimate these are only about 10 to 15 per cent of our $14 billion of sales or $60 billion of billings.”

It is only a decade ago that Thakrar and Koome started emerging as contenders to reshape the Kenyan communication industry.

The former started aggressively building his agency by helping EABL sell beers and serving other major brands as an affiliate of global network agencies. He quickly mopped up fallen rivals like McCann Ericksson.

By 2005, when Universal McCann South Africa gave notice of its intention not to renew its contract with Coca-Cola for media services in Africa in 2006, Scangroup became the benefactor.

It was on the back of the Coca Cola account that spans 27 countries that Scangroup transformed itself into a major regional player.

Koome made his name as the head of PR for Kenya Airways, getting into the business through the non-traditional route of public relations, running Ogilvy’s communication shop. He made Ogilvy PR such a success that he was appointed to head the East African operations in 2005.

Bharat and Koome were known in the industry as bitter rivals. Scangroup struggled to build its PR division, while Ogilvy PR flourished.

Ogilvy struggled to win big advertising pitches, until three years ago — particularly after it snagged Essar and recently the Zain account, to which it beat Scangroup down to the wire. Then the two men started talking seriously.