todays afr bit, page-3

Dalibor - thought I would contribute my 2 cents worth on PGA.

I have been scouring the market lately looking for undervalued opportunities, and I reckon that at current prices PGA clearly falls into that category.

I didn't see the AFR article that you refer to - but you have done a great job of setting out some of the issues that a simplistic review of PGA might identify.

My contention would be that:

1. While there have been some troublespots, on balance the PGA acquisition program (which now looks to be largely over) has been a huge success. just look at their stated forecasts for EBITDA growth in 2009. PGA already has had a bunch of businesses that have come off earn-out and the key guys have tended to either stay with the business or in a few cases retire to let the next generation take the reins - there is no sign of talented individuals leaving to start up their own little boutique operations again.

2. There is not too much risk with losing good people etc as PGA has deliberately sought to acquire businesses that do not have too much "talent stress"

3. PGA is far better positioned to weather a downturn in the advertising sector than many people give it credit for. In fact many of their businesses are quite boring "meat and potatoes" operations with very little exposure to a downturn.

Based on my assessment, only 15% of earnings generated from advertising campaigns – bulk of the business counter-cyclical to advertising spend and in some cases not even allocated out of the marketing budgets - 30% field marketing, 30% internet, 10% public relations / public affairs and 10% strategic consulting. These areas are all showing very strong growth.

4. Yes, they have run up debt to fund acquisitions etc. but the resulting debt burden is far from crippling. 4.0X + interest cover according to CSFB in 2009


All up - the market hates them right now due to concerns about debt level and impact on earnings of a downturn. Personally - I think that the market has gotten this wrong on both counts.