Big month for Cossette
Agency picks up 21trophies, two alliances and a big account

Those heavy May rains did not seem to fall on Cossette Communication Group Inc. Last week the province's advertising industry showered the Quebec-city based agency with 21 prizes, commonly known as the Coq D'Ors, at its annual awards gala.

Quebec's biggest ad agency picked up more trophies than the nine next largest put together. Out of the province's ten biggest, only Bos managed to pick up more than two awards, finishing the night with 13. LG2, a smaller agency, surprised everyone by picking up nine prizes.

"We are happy that are winnings were broadly based, said François Duffar, the group's president, in a telephone interview from his Florida hotel. "The awards came from both our traditional advertising side, but also from the direct-marketing and interactive sectors."

The truckload of trophies, was a fitting end to a month that saw Cossette announce, increased revenues and profits, two advertising and marketing deals in two days, and pick up the Quebec government's ad-buying account.

On May 8th, Cossette announced that a memorandum of understanding was signed through which the company would take a 40 per cent stake in Proximi-T, one of the country's fastest growing information technology consulting firms, for a reported $3 million.

Proximity, which employs 100 people at its Montreal and Toronto offices, and generated $7 million in revenues last year, will maintain its independent operating structure. Its employees will work with those in Cossette's existing interactive division, to offer clients a broader range of Internet and E-commerce services.

The next day, Cossette announced the acquisition of Koo Creative Group Inc., a Vancouver-based communications firm, specializing in marketing to Canada's Asian community. Koo currently employs about 40 people, and generates annual gross revenue of $4 million. Koo's management and staff, who for the most part will be staying on, will be moving to Cossette's Vancouver offices later on this year.

The two moves do not come as a complete surprise to Cossette watchers. When the company issued shares last year in a $42 million initial public offering, its stated purpose was to edge away from its policy of internally generated growth, and to use the new funds to build the firm through acquisitions. But the two deals announced this month, as well as last year's acquisition of Halifax based Pulse Marketing Inc. are relatively small compared to the amount of cash raised.

Although both the company's revenues and profits were running ahead of last year's record pace, these two statistics do not tell the whole picture. Second quarter sales for the period ended March 31, 2000, were $27.3 million, up 15 per cent from the same period the previous year. Net earnings for the quarter were $2.7 million, up 26 per cent from the corresponding period in 1999.

For the six months ended March 31, 2000, revenues were $51.3 million, up 16.1 per cent from the same period last year. Net earnings were $4.7 million, up 30 per cent from the same period the previous year.

These numbers seem impressive enough. However fully diluted earnings per share for the six months ended March 31, 2000, come out at $0.25 per share, up only 4.2 per cent from the same period last year, a much less impressive figure.

The problem is that although earnings are growing, since last year's public offering, there are more shares to split them into. Much of the money Cossette raised is still sitting in the bank, and is not generating sufficient returns, to contribute to the company's earnings growth, on a per share basis.

To grow earnings faster, Cossette must put that cash to use. Hence the continued search for bigger acquisition targets, many of which are in the United States. Unfortunately, agencies sell at a much higher price earnings multiples in the U.S. than they do in Canada. In a consolidating industry, there are fewer available. Cossette management has been cautious about not making a deal if the underlying fundamentals are not there.

According to Duffar, the fact that the company is now public will not alter its approach. "You have to remember that before we issued stock, we already had almost 60 shareholders in the company. So we are used to answering questions about earnings and revenue numbers."

Which is all to the better for Cossette. Because although slow earnings per share growth may not be ideal in today's stock market, they are much better than overpaying for an acquisition, or buying an agency where the fit is not good.

Cossette, which employs more than 1,000 people and last year showed revenues of $94 million, got where it is by doing things at its own speed. It will be well served to continue that strategy, and not to make moves just for the sake of doing something.



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