M&C Saatchi’s share price has plunged by more than 40% after the advertising agency admitted its accounting scandal is much worse than previously thought and issued a second profit warning in less than three months.
The embattled group, which has clients including O2 and Sky in the UK, said that after an external review by PricewaterhouseCoopers, it would be taking an £11.6m hit.
When the scandal was revealed in August, the company said the charge would be £6.4m, prompted by “overaggressive” revenue recognition at its UK operation.
The “misapplication of accounting policies” also extends to areas including understating project costs, wrongly listing assets on the balance sheet such as obsolete software, or overstating the value of assets such as fixtures and fittings.
The company has admitted the practice of revenue over-recognition could affect first-half results statements stretching back as far as 2014, as a result of bringing forward revenues that were due in the latter half of those financial years.
David Kershaw, the chief executive of M&C Saatchi, said: “This restatement of our numbers and the reduction in forecasts make for very difficult reading – both for us as a management team and for all of our stakeholders.
“The only positives that we can offer are that a robust review has been undertaken and we have, under our new group finance director, started implementing processes and procedures to prevent such issues arising again.”
The company is facing its biggest crisis since being founded by Charles and Maurice Saatchi in 1995. Shares in the business have fallen by 72% this year to a price of 80p on Wednesday morning.
M&C Saatchi also issued a second major profit warning on Wednesday after client spending in the fourth quarter fell well short of expectations. The company, which has recently completed an expensive refurbishment of its offices in central London, also blamed “higher than expected central costs”.
The ad agency expects underlying profit before tax for its 2019 financial year to be up to 27% lower than the £29.5m it made last year. It is the second profit downgrade in recent months following a warning in September of a fall of up to 10%. The agency’s two biggest markets are the UK and Australia.
The financial crisis has also prompted the company to begin a £2.5m cost-cutting drive in the UK, which will include significant job reductions. The cuts are expected to produce annual savings of about £6m in 2020 and onwards.
Kershaw said: “The trading performance in the second half of this year is disappointing.” He added that the business expected to see “modest growth” in adjusted profit before tax in its 2020 financial year.
The share price slump poses a significant issue for M&C Saatchi because it has paid for the acquisition of rival agencies by issuing shares to owners and founders. The company’s half-year report shows it owes more than £22m of shares under those deals over the next year. With a low share price, this will significantly dilute values for existing shareholders, according to analysts.
