Can BBDO wriggle out of its $58m liability?

 

john-wren1Conspicuous on the list of bankrupt Chrysler’s many creditors is Omnicom-owned ad network BBDO, with an awesome $58.1m (£39m) outstanding. Enough to sink the Detroit agency, left to its own devices, and a figure all the more embarrassing – apparently – because Omnicom high command had massively underestimated the liability only a few days before in the Q1 earnings call (April 27th).

In answer to an analyst’s question, this is what Omnicom president and chief executive John Wren had to say about BBDO’s exposure to Chrysler: “I think our exposure is extremely limited, maybe really to the point of zero. If it were to take an extreme scenario the other way, which I think is remote, maybe even impossible, which would be the brands went away and we had a complete shutdown of the office, I think our cash exposure is probably to $25m to $35m. There may be some additional charges or write-off furniture and fixtures and some things like that, but I think that is an extremely unlikely set of events.”

Well, it looks like an “extremely unlikely” set of events is unfolding before his very eyes just a few days later. What’s he going to do about it?

The first thing to note is that not all the $58.1m is technically owed to BBDO. Quite a bit seems to have been contracted to local TV stations (those, that is, who were foolish enough not to ask for their money upfront in recent months). In these situations the agency normally acts as financial principal – meaning that it liable for the lot. However, Omnicom is confident it will avoid the worst on account of two factors. The government has created a special fund to support so-called “critical vendors”. A court hearing will decide whether BBDO qualifies as one. If successful, the agency may collect about a third of the $58.1 million. For the rest, it will invoke its so-called sequential liability insurance (limiting its exposure to those self-same local TV stations).

That would explain why Omnicom executives are relatively upbeat about events and why the Omnicom share price has scarcely missed a beat, so far.

However, both these factors are highly contingent. No one knows what the outcome of the court hearing will be. Nor how water-tight the sequential liability clauses are when tested by insurance companies reluctant to make such a huge payout.

Just one more thing, as the gumshoe Columbo used to say. Does this $58.1m include media? If it does, that would explain why local television stations are running scared. But not why BBDO, a creative agency, is named as the creditor instead of media buyer and planner PHD. If it does not include media, BBDO has been earning one hell of a lot in creative fees… Something does not add up. All we can safely conclude at this stage is that Omnicom is owed an awful lot of money.

One to watch, at any event.

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2 Responses to Can BBDO wriggle out of its $58m liability?

  1. [...] Omnicom (BBDO, TBWA, DDB etc), too, posted pretty dismal figures, slightly more encouraging than IPG’s but not, on most criteria, as buoyant as Publicis’. It is laying off 3,500 of its staff, nearly 5%. Profits for the last quarter were 24% down, about the same as the previous quarter. Which was probably pretty good really, considering Omnicom’s $58m exposure to bankrupt Chrysler. On this subject, however, chairman and ceo John Wren was understandably vague – despite analysts’ obvious interest in the subject. It was the second biggest search term employed in Omnicom’s earnings call. There are, as I have pointed out before, some unresolved mysteries about Chrysler and Omnicom. [...]

  2. [...] For Omnicom, the win is a welcome comeback to the car sector. It lost out heavily when Chrysler went into Chapter 11 last year. [...]

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