‘Faster, better and cheaper’: Sorrell’s S4 Capital set to blaze ahead in digital marketing space

With such an attention-grabbing number, it is no small wonder that the titans of the advertising world are taking notice, including Martin Sorrell, famous for heading advertising and public relations group WPP for more than three decades. In 2018, less than a year after he left WPP, Sorrell embarked on a new venture with S4 Capital, which explicitly seeks to carve a niche in the digital marketing space.

He made good use of capital markets. S4 Capital, in its previous reincarnation, was a UK-listed shell company. Sorrell took it over and injected some capital of his own; riding on his reputation, he made a series of acquisitions paid for using new S4 Capital shares. It quickly grew to become a 2,500-strong multinational firm, positioning itself as a “purely digital advertising and marketing services business” that aims to disrupt the US$1.7 trillion advertising industry by using first-party data to develop ad content.

As executive chairman, Sorrell has enlisted some of his ex-colleagues from WPP including CEO Michel de Rijk, who says that this new venture presents an exciting opportunity to experiment with new approaches to marketing without the baggage of a traditional firm. “S4 Capital is trying to get to the future faster,” De Rijk tells The Edge Singapore in an interview. By starting from scratch, the new firm can try out new ideas that more established businesses may not have the flexibility to implement, he says.

Amid the widespread economic fallout from Covid-19, S4 Capital was able to keep growing. Many firms have put their marketing campaigns on hold, but technology companies, which account for more than half of S4 Capital’s business, have remained relatively unscathed.

For its 1Q20 trading update (which did not disclose bottomline numbers) the company reported revenue of GBP71 million ($124.8 million), a 73% y-o-y increase albeit partly driven by contributions from new acquisitions. Under a like-for-like comparison, S4 Capital still managed to grow 17% y-o-y. For the full year 2019, S4 Capital reported losses of GBP10 million, from GBP8.1 million in FY2018. In an indication of the rapid growth, revenue in the same period was up nearly three times to GBP215.1 million.

While the bulk of S4 Capital’s current revenue originates from developed Western markets, De Rijk expects faster-than-average growth from S4 Capital’s businesses in Asia Pacific, with the proportion of revenue from this region seen to double to 20% with a target of 40%.

According to De Rijk, growing digitalisation in Asia and the emergence of cashless economies in China and Indonesia are a key source of clients, revenue and data for the company. The firm has already established its APAC headquarters in Singapore and acquired South Korean data analytics firm Datalicious.

A winning formula
Given its growth trajectory, some analysts are valuing S4 Capital like a technology company rather than an advertising agency. They cite S4 Capital’s growing correlation with the likes of Accenture, Google and Facebook. “S4 Capital’s atypical exposure is reflected in its more resilient top line in the short term and organic growth opportunity in the longer term,” say Jeffries analysts Becky Lane and James Wheatcroft. The analysts have maintained a “buy” call on the counter with a target price of GBP2.70 up from an initial GBP2.00.

According to De Rijk, S4 Capital’s unitary structure has allowed the firm to combine the scale and expertise of an established firm with the flexibility and innovation of a startup. It acquires promising advertising technology firms to bring in tech-savvy advertising leaders to drive digital transformation. The new ideas of this young talent is combined with the experience of seasoned veterans like Sorrell and De Rijk. The firm’s leadership has about five decades of collective industry experience among them.

S4 Capital’s growth strategy is to acquire other firms that bring their own specialisation or market focus — 11 firms have joined S4 Capital’s ecosystem in this way. These include Dutch creative digital production company Media Monks, which was acquired for US$350 million, and Melbourne-based marketing firm BizTech. Most of these firms are founded by millennials aged 25 to 30, giving S4 Capital a pulse on the trends in the digital-savvy millennial market.

De Rijk observes that most corporate investors rarely fully integrate start-ups they’ve acquired into their operations, instead maintaining some separation in the way the businesses are run. This hinders the integration of innovative processes and ideas from the newly-acquired entities into the parent company’s core business. Full integration, De Rijk adds, allows young businesses to scale faster than if left to their own devices. Sorrell also tells Media Village that S4 Capital’s full acquisition policy ensures that tech leaders brought into the company are fully invested in S4 Capital’s vision rather than being interested in only selling firms for profit.

The vision that Sorrell wants his new recruits to buy into is to be “faster, better and cheaper”, a mantra that is critical with ever-shorter product life cycles and rapid changes in contemporary markets. In the past, size mattered and scale was an advantage. Not any more. “If you looked at traditional advertising 20 years ago, not much had changed since the years prior. Now, however, [the] digital [world] has changed that, and people are doing new things every six months,” says De Rijk.

With the Covid-19 fallout, another quality is called for: adaptability. Realising that firms need to continue interacting with their clients in spite of a lack of footfall — companies like Nike even doubled down during Covid-19 — the firm quickly ensured that they developed digital alternatives to existing physical advertising methods. Media Monks developed the ability to conduct a remote advertising shoot, with the bulk of its staff such as directors, branding team and digital editors working remotely to minimise personnel on the studio floor.

To realise this agility, S4 Capital relies on what Sorrell calls the “Holy Trinity” — first-party data, digital advertising content and programmatic advertising. First-party data is obtained through close partnerships (e.g. digital marketing training) and personal ties with firms like Google and Facebook. This data then informs advertising content and concepts and automates the purchase of digital advertising space through algorithms and machine learning, with new data derived from these new campaigns contributing to further rounds of refinement.

Such a strategy allows S4 Capital to always remain at the forefront of consumer trends as well as one step ahead of the competition. Sorrell tells Media Village: “The data you get from that enables you to refine the content yet again. It’s a circular process. I think the nearest analogy is to an election campaign, which is always on.”

Yet, De Rijk appreciates that digital technology alone will not be enough to create a compelling advertising campaign. And that is why Media Monks, which produces creative ad content, was acquired to win the hearts and minds of consumers. Both the human and digital elements of marketing must work in tandem in producing a compelling ad campaign. “We must never underestimate the human element in advertising. We must use the available technology to ensure we better connect with people,” De Rijk explains.

“The most successful brand storyteller is a meaning maker who tells the story with the savvy of Don Draper, the cheeky cleverness of Dr Seuss, and the data fluency of Barack Obama’s re-election campaign team. People will congregate around ideas and stories, not data points and spreadsheets,” writes Christel Quek, global social manager at Havas Media Group, in the Harvard Business Review.

A winning hand
As befitting an advertising agency, S4 Capital has wasted no time bragging about its own growth and achievements. “Since the last AGM [annual general meeting] in May 2019, our company has doubled its number of people to 2,550 in 30 countries and doubled its market capitalisation to around GBP1.2 billion. S4 Capital has achieved GBP and USD “unicorn” status within 18 months of re-listing and would rank in the FTSE 250 by market capitalisation, if it had a premium listing,” proclaims its AGM statement.

S4 Capital expects double-digit like-for-like revenue and gross profit growth on top of reasonably strong Ebitda for 2020. It cites big names such as PayPal, Twitch, Domino’s and Fuji Television among recent client wins and is awaiting results from two pitches that could be potential “whoppers” (i.e. 5% of revenue). Despite the Covid-19 fallout, it still sees a “fighting chance” of hitting its 2020- 2022 target of doubling both its top and bottom line during these three years.

Interestingly, the pandemic, which has forced on accelerated digitalisation, is seen to benefit S4 Capital. Jeffries analysts Lane and Wheatcroft say that as clients increasingly pivot from physical advertising projects to digital, S4 Capital is capturing market share from competitors as some of its biggest pitches have arisen from this newly-created demand for digital advertising. With increased “change agents’” and transformation that could be “violent and experimental”, S4 Capital’s emphasis on agility and its “Holy Trinity” model augurs well for its future success, the analysts add.

“We expect S4 Capital’s Ebit to triple over the next four years, before likely M&A. We think further M&A could add more than 50% to EPS by FY24. We think S4 Capital will continue to re-rate as this growth opportunity is realised,” say the analysts. Investors can buy into this growth cheaply. With a price/ earnings-to-growth (PEG) ratio of 1.1 in 2020 which is set to fall to 0.5 in 2021, S4 Capital is now valued 76% less than peer advertising counters, with this gap to rise as high as 85% next year.

On June 15, S4 Capital shares closed at GBP2.40, up 24.7% year to date. At this level, Sorrell’s next act is valued at GBP1.17 billion. In contrast, WPP, his previous gig, is valued at GBP7.66 billion. Time will tell if this gap will be narrowed.