LONDON  - French advertising company Publicis’ biggest-ever acquisition is a distraction from more pressing matters. Chief Executive Arthur Sadoun on Sunday announced he was spending $4.4 billion on Alliance Data Systems’ Epsilon digital marketing unit. It’s a bold bet on more targeted advertising but does little to help the French group hit its short-term revenue targets or lure back lost clients.

The ad industry is suffering structural changes which are unlikely to ease soon. Consumer-goods groups are under pressure to cut marketing spending. Clients have also been dumping Publicis, forcing Sadoun to warn of a bumpy first quarter in February. Big new customers including GlaxoSmithKline and Fiat Chrysler Automobiles will help, but even then Morgan Stanley analysts reckon the company’s first-half revenue will be flat.

Buying Epsilon, which specialises in data-based marketing like targeted emails, gives the 11 billion euro company a new service to offer its clients. The acquisition gathers almost all its revenue from the United States, so adding Publicis’ global network should provide a boost. Sadoun says he can plug Epsilon into his company the day after the deal closes in the third quarter, which means it could contribute to his target of 4 percent organic revenue growth in 2020.

But Publicis knows all too well the risks associated with large acquisitions. Its previous record outlay was the 3 billion euro acquisition of Sapient in 2015. The company wrote off 1.4 billion euros of the purchase price just two years later. Integrating 9,000 Epsilon workers into the 75,000-strong company will be a challenge.

The financial metrics are also a stretch. Publicis says writing down goodwill on the deal over 15 years will save it taxes worth $450 million in today’s money. Generously deduct that from the purchase price, and Epsilon would still need to more than treble last year’s operating profit of $147 million for the deal to earn a 9 percent return, according to Breakingviews calculations assuming a 28 percent tax rate. That’s demanding considering that Epsilon’s revenue declined last year. Sadoun hasn’t spelled out cost savings beyond $60 million already underway.

Publicis shares on Monday recovered the ground they lost when news of the deal leaked earlier this month. But relief that the company is not spending more will only be temporary.

CONTEXT NEWS

- French advertising group Publicis said on April 14 it would buy Alliance Data Systems' Epsilon marketing unit for $4.4 billion, expanding its digital business and North American footprint.

- Publicis will pay $4.4 billion in cash, but said the net price was $3.95 billion after deducting a tax benefit from the deal.

- Epsilon generated $1.9 billion of net revenue in 2018, 97 percent of which was in the United States.

- Publicis said the net purchase price implied a multiple of 8.2 times Epsilon’s adjusted EBITDA for 2018 of $485 million.

- Publicis shares were up 3.4 percent at 48.8 euros by 0845 GMT on April 15.

(Editing by Peter Thal Larsen and Bob Cervi)

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