Omnicom Issues Senior Notes – Analyst Blog

Last week, Omnicom Group Inc. (OMC) priced its 4.450% senior notes due 2020 aggregating $1.0 billion. The notes will mature on August 15, 2020 and the transaction closed on August 5, 2010.

 

The proceeds from the offer will be used for general corporate purposes such as acquisitions and repurchase. During the second quarter of fiscal 2010, Omnicom repurchased $316 million worth of shares and increased its quarterly dividend by 33% from 15 cents to 20 cents per share. Thus, annual dividend increased from 60 cents per share to 80 cents, a dividend yield of about 2.3%. Omnicom estimates dividend per share to reach 92 cents in 2011.

 

Omnicom’s strategy is to acquire complementary companies with strong entrepreneurial management teams to expand its client base. During fiscal 2009, Omnicom acquired 4 subsidiaries and increased its stake in various existing ones. The increased integration process would enhance its client base, which is its key growth strategy as Omnicom’s business evolves around its clients only. However, this huge dependence on clients is risky as the loss of a client or reduction in client spending would adversely affect the company’s results.

 

An intensely competitive advertising environment and pricing pressures are another hindrance. Omnicom’s direct competitors are Interpublic Group of Companies Inc. (IPG) and WPP Group plc (WPPGY). However, management remains committed to expand its business and relationships in Asia, where operating conditions remain extremely favorable. This should improve the long-term profitability of the company.

 

Markets are picking up and the improving economic conditions should benefit Omnicom as they help increase clients’ spends. We continue to rate the stock as Neutral. Our short-term rating also remains Hold with a Zacks #3 Rank.