Moody's: WPP unchanged

Moody's Investors Service said that WPP Group plc's ratings (senior at Baa2; stable outlook) remain unchanged following Monday's announcement that WPP has executed a merger agreement with Grey Global Group Inc. to acquire Grey's entire share capital (fully diluted) for a consideration of $1.52 billion. Half of the consideration will be paid in WPP shares.

The transaction is still subject to approval by Grey's shareholders and to customary regulatory approvals and is expected to close at the end of the year.

WPP expects Grey to remain net cash positive at around the $172 million level shown as of June 30, 2004 which together with expected option proceeds (£21 million) would result in funding needs for WPP of around £307 million before deal and integration costs (together estimated to be around $50 million).

While Moody's acknowledged the substantial equity component of the deal, it still results in a material cash outflow for WPP and consequently the company will (if the deal closes in 2004 as planned) miss its target to achieve a neutral net cash flow position before net working capital changes. The agency also noted that WPP is taking on Grey's rental obligations ($80 million annual payment in 2003) and its earn-out obligations ($54 million as of Dec. 31, 2003). Overall measures of relative adjusted debt are therefore expected to remain relatively static rather than showing some improvement as previously expected by Moody's.

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