S&P Global Ratings downgraded Publicis Groupe SA's long-term ratings to BBB from BBB+, citing concerns over the advertising firm's operating performance and declining revenues.
The company is set to end the year with less profit, having revised its profit guidance to negative 2.5%, below S&P's previous projection of zero growth. Organic revenue growth for the first nine months of 2019 declined 1.4% year over year.
S&P attributes Publicis' revenue woes to the company's "weakening competitive position." Publicis has yet to reposition its subsidiary Sapient Corp. from project-based digital marketing services to long-term business transformation programs. Other vulnerabilities include its high exposure to fast-moving consumer goods and retail companies which show high attrition rates in traditional advertising, increasing competition from consulting firms and other new players, and the sensitivity of advertising revenues to GDP movements.
"We believe the group's performance could weaken further if there is a more significant and prolonged economic recession in the U.S and in Europe than our economists currently expect," S&P said, adding that these risks might make it difficult for Publicis to restore organic revenue growth and reduce its debt.
S&P projects Publicis to maintain strong cash flow of €1.3 billion to €1.5 billion annually, with anticipated debt to EBITDA of 2.0x and a free operating cash flow to debt ratio in the 25% to 40% range by 2021, despite its $4.4 billion acquisition of Epsilon Data Management LLC earlier in 2019.
The rating agency gave Publicis a stable outlook, reflecting their view that the company will successfully execute the transformation of Sapient and the integration of Epsilon, while implementing a conservative financial policy that will allow it to reduce its leverage to below 2x.
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