STW sold off as rivals merge

STW Communications Group (SGN) tumbled today following news that two of its largest rivals are merging to become the world’s biggest advertising group.

US-based Omnicom Group and Paris listed Publicis Groupe, the second and third biggest global advertising groups, have agreed to join their businesses to become $35 billion market cap entity that would oust WPP from its top spot.

STW’s shares fell 4.9% to $1.56 ahead of today’s close – it’s biggest fall in 2½ months.

Deutsche Bank thinks that the merger will be approved by competition regulators, and if that transpires, Omnicom and Publicis will become the biggest media buying group in Australia with around $2.8 billion in combined bookings compared with WPP’s Group M at around $2 billion.

WPP is a strategic partner of STW and Deutsche thinks it is too early to tell if the merger will have any impact on STW.

However, the potential impact could be positive or negative. On the one hand, mergers sometimes become a distraction to staff due to potential job losses at the affected group, and that could allow rivals (STW in this case); on the other hand, the combined entity will have significantly more scale and buying power, according to Deutsche.

While today’s sell down seems a bit overdone, it comes as little surprise that profit takers would move in aggressively given that STW’s share price has run up by over 60% in the past 12 months.

The correction in the share price could prove to be a buying opportunity as Deutsche is still calling STW its “top small cap pick heading into the reporting season”.

The broker is urging investors to buy the stock with a price target of $1.75.

STW is part of the Uncapped 100.