By Ruth Bender and Suzanne Vranica
France's Publicis Groupe SA tried to reassure investors about
the fate of its $35 billion merger with Omnicom Group Inc. of the
U.S. on Wednesday, saying that it was confident the proposed new
company would get necessary approval to have its fiscal residence
in the U.K.
Publicis did note however, that the deal requires French tax
approval and the company didn't make any comment about its
expectations for such approval.
Publicis' statement, issued late in the day Paris time, came a
day after Omnicom CEO John Wren intensified uncertainty about the
deal by telling investors on a conference call that he couldn't
predict when the deal would close because of its "complexity and
open issues." Mr. Wren also said that approvals by various tax
authorities were requirements for the deal to close and "there is
no Plan B."
Uncertainty about the future of the deal weighed on shares of
both companies on Wednesday.
The ad giants took Madison Avenue by surprise last July when
announcing their trans-Atlantic merger. Nine months later, with the
deal still not completed, investors are perplexed that the two
communications giants don't appear to be speaking from the same
script.
"We have to admit that we have been surprised by the cautious
tone of Omnicom management, especially in contrast with the
optimism displayed by Publicis," said Charles Bedouelle from Exane
BNP Paribas in a note to investors.
Publicis and Omnicom earlier had blamed the delay on getting
antitrust approval from Chinese authorities. Then, last week,
Publicis chief executive Maurice Lévy said that the group is still
waiting for approval from French tax authorities to exempt
shareholders from paying taxes on profits they would make on new
shares they will receive during the merger. Mr. Lévy said the delay
now means the deal's approval would definitely slip into the third
quarter.
He said French tax authorities have told Publicis that there is
no reason to speed the approval process as the group is still
waiting for China's antitrust green light. In Publicis' statement
on Wednesday night, Publicis said the process seeking a tax ruling
in France "is standard in this type of merger."
But Omnicom's Mr. Wren sounded more pessimistic on Tuesday,
saying tax issues are proving to a bigger obstacle than
expected.
Mr. Wren brought to light another tax hurdle: Omnicom and
Publicis have applied not only to Dutch tax authorities--as part of
the initial plan to incorporate the new Publicis Omnicom Group in
the Netherlands--but also to U.K. tax authorities for the merged
group to have "exclusive tax residency in the U.K."
Mr. Wren said that they hadn't yet received approval from either
authority and that if they failed to do so, it could jeopardize the
deal.
In its statement on Wednesday, Publicis said the new company was
already registered in the Netherlands. It also said "we are
confident" the new company will become a resident of the U.K. for
tax purposes and noted "we have no indication that approval" from
China "will not be obtained within a reasonable time period."
Talk of the U.K. requirement has taken investors by surprise.
"This is the first time they talk about splitting the residency for
tax purposes and by extension the first time they say it is a deal
breaker," said Keplerch Cheuvreux analyst Conor O' Shea. Mr. O'Shea
said he expected a deal to still happen but that the closing would
likely slip into the fourth quarter. "The risks of it not happening
at all have certainly increased, especially as there are some
rumblings about neither party accepting to play second fiddle in
the shakeout."
Even so, several executives inside Omnicom and Publicis said
they don't think the deal will fall apart. An Omnicom spokesperson
said there was no reason to believe that the deal's agreed-upon tax
structure couldn't be achieved.
The Dutch Tax and Customs Administration didn't respond to a
request for comment. A spokesman said the U.K. tax authority "does
not discuss the tax affairs of individual businesses." The French
finance ministry and French Treasury didn't return calls seeking
comment on the status of the process.
Publicis shares fell 2.7% in Paris trading Wednesday, to
EUR61.75 ($85.22), while Omnicom shares were off about 1.6%, to
$68.78 in New York.
The U.K., while likely open to the idea of the merged company
basing itself fiscally there, "will have to ensure that the
businesses are squeaky clean and that the merged entity meets the
relevant requirements for being a tax resident," said Ben Jones, a
tax expert at Eversheds in London.
The Netherlands is a popular location for multinational
companies seeking the reduce their tax bills, considered attractive
because of its extensive network of tax treaties and relaxed fiscal
treatment of capital gains, dividends and royalty payments. Under
pressure to combat tax avoidance, however, the Dutch government in
September said it would adopt a tougher approach against "letterbox
companies," financial holdings that largely exist for tax purposes
and don't have any business in the country, a factor that could
complicate an already complex deal structure.
The tax exemption could directly affect Mr. Lévy, who holds a
2.7% stake himself in the French group he has led for more than 30
years, as well as France's Badinter family, Publicis's largest
shareholder.
But there are plenty of questions beyond tax. Four months after
the deal's initial, optimistic closing date, top executives remain
tight-lipped what will happen after the deal's close--particularly
who will lead the combined company's media buying operations or be
its chief financial officer.
Tom Fairless in Brussels, Maarten van Tartwijk in Amsterdam and
Nathalie Tadena in New York contributed to this article.
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