GAULTYGER

WATERSTONES





STERLING COOPER PARTNERS





Dropping Out

After three brief years, the Madison Avenue Ad Agency
decides to take itself private. Drastically lowering print
ad revenues lead us to believe SCP is over-valued.
Moreover, FCF inflection will take longer than we
expected (late 72-74). Attractive buyout negotiations
notwithstanding, poor dividend yields keep us SELL.
Our analysis on Sterling Cooper Partners is unchanged
heading into the buyout and 1Q71 results. We continue
to view SCP as a challenging prospect. The company
has come a long way since its IPO at $11.
Agency IPOs are tricky initiatives, be it a law firm, a
consultancy or an advertising firm, and especially
thorny in the ones which had planned to use the capital
to fund an aggressive expansion as SCP did in early
1968. The companys desperate bid to become one of
the big boys on Madison Avenue was stalled after a
series of high profile departures and portfolio losses.
We believe that currently theres almost zero value in
the firm's physical capital; the office space is rented,
and the desks and typewriters are of minimal value. The
brand name may have some value, but it is intimately
linked to the individuals who lead it, which means they
could walk out the door any day of the week; Sterling
Cooper Draper Pryce wouldnt be much of a
powerhouse without Don Draper.
The firms has a poor dividend payout. Those individuals
who are creating value know exactly what they are
worth and has been demanding a high share of the
GAULT YGER WAT ERST ONES RESEARCH
NORT H AMERI CA

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Rating
Sell

Industry
Advertising
March 12, 1971
Price at 11 Mar 1971 (USD) 3.14
Price Target 1.80
52-week range 6.31 2.27

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money they bring in, meaning that money isnt going to
shareholders.
A Troubling 1970
By all accounts, the firm did not have a good year.
Rumors of sleazy deals abound. The firm bungled the
Jaguar account that the firm spent two quarters
coveting. Associate Pete Campells loss of the $9
million Vicks account has immediately entered the
Madison Avenue lore with whispered tales about
brothels, cocaine, and adulterous fathers-in-law.
All in all, it was not a good year for the Madison
Avenue. The series of ad agency IPOs which began
six years before has stalled. Public offering fever
began with Papert, Koenig, Lois, which was followed
by the more familiar likes of DDB, Grey, FCB, J Walter
Thompson and Foote, Cone & Belding. David Ogilvy
took Ogilvy public in 1966 and claimed Warren Buffet
as an early investor. Wells Rich Greene, led by media
darling Mary Wells also went public in 1968, selling
400,000 shares.
None of these eight companies have ratings above
HOLD. SCP is hemorrhaging money and their main
rivals, Cutler, Gleason, and Chaough are in danger
because one of the partners has pancreatic cancer.
This is not a good year. But the ad men are slow
learners. Even as we filed this report, the renowned
Saatchi brothers are mulling to take Saatchi & Saatchi
public through a reverse merger.
Out of Frying Pan
Loss accounts are more troubling, especially for a firm
which aims to rapidly expand, than wider industrial
malaise. After losing Lucky Strike, Jai Alai, and Glo-
Coat, and resigning the North American Aviation and
Clearasil accounts, SCP finished the decade with a
much smaller staff and only 60 percent of the billings
it had when the doors opened.
The birth of Sterling Cooper Draper Pryce (SCDP)
occurred amidst a buyout of Sterling Cooper by
McCann in 1964 and was nothing if not dramatic.
"Last year, our agency was being swallowed whole,"
Don Draper then told the Wall Street Journal. "I could
die of boredom or holster up my guns. So I walked
into Lane Pryce's office and I said, 'Fire us.' Within a
year, we'd taken over two floors of the Time-Life
Building."
The agency opened shop with seven accounts from
predecessor agency Sterling Cooper Lucky Strike,
North American Aviation, Secor Laxatives, Jai Alai,
Samsonite, Clearasil, and Playtex and around $34
million in billings.
Sterling Cooper alum, Ken Cosgrove, bumped that
number up to around the $40 million mark when he
moved to SCDP from McCann.
But the numbers took a hit when Roger Sterling's
longtime account, Lucky Strike, dumped him to join
the rest of British American Tobacco at BBDO and
took its $24 million in billings with it.
In the wake of that account's departure, Glo-Coat also
fled, and the account team of Campbell, Cosgrove,
and Sterling had a hard time finding any brand who
would sign on with the fledgling agency to make up
the difference.
After winning a $2 million contract from Ponds, SCP
had to resign Clearasil on the account of conflict of
interest. In the process, the agency snagged the
larger account of Clearasil's parent company, Vick
Chemical, from Tom Vogel. That account is now gone
too, in a whirlwind of scandal we have resigned to
expect from SCP.
Now remaining at SCP are only smaller accounts:
Samsonite, Playtex, Sugarberry Ham, Life Cereal,
Fillmore Auto Parts, Birds Eye, Mountain Dew, Topaz
Panti-Hose, and Secor Laxatives -- an account
Sterling Cooper had since 1947. Their total billing is
not more than $12 million.
The companys gung-ho partners, however, remain
optimistic. They have decided to buy back the
company cheaply and take it private once more.
A private SCP might actually be a better SCP. While
things look a bit troubling for Sterling Cooper Draper
Pryce, they have their sights set on a few big fish. If
the Life Cereal and Mountain Dew works prove
successful contracts with their parent companies
Quaker Oats, PepsiCo, and Frito Lay are bound to
follow. Although SCP has once lost the Honda
Motorcycles pitch, they had been offered another go
at the company's new product, the Honda cars first
released until 1970.
And lastly, American Cancer Society impressed by
the firms anti-tobacco stunts has been in the
discussions with the creative team at SCP to lead
their advertising campaign. This account will likely be
pro bono, however.


GAULTYGER
WATERSTONES
GAULT YGER WAT ERST ONES RESEARCH

March 12, 1971
Sterling Cooper Partners
STERLING COOPER PARTNERS

Income Statement
(in USD 000)
1971 1972e 1973e
Total Revenue 17,453 17,037 15,202
Operating Cost 10,171 9,953 9,084
Total Costs 11,683 11,438 10,257
EBITDA 5,770 5,599 4,945
Depreciation 1,330 1,202 1,076
Other Income 463 467 465
EBIT 4,904 4,863 4,334
Interest Costs - - 8
Share of Profit in Associates 366 329 221
PBT 5,269 5,192 4,547
Total Tax 1,133 1,116 1,043
PAT 4,136 4,075 3,504
Consolidated PAT 4,136 4,075 3,543
Minority Interest 414 408 358
Profit to Shareholders 3,723 3,668 3,185

Balance Sheet
(in USD 000)
1971 1972e 1973e
Assets
Gross Fixed Assets 31,458 29,058 26,367
Accumulated Depreciation 15,654 14,324 13,122
PPE 15,804 14,734 13,245
Total Non-Current Assets 17,723 16,302 14,470
Cash & Cash Equivalents 10,012 9,378 10,155
Total Current assets 13,535 12,824 13,261
Total Assets 31,258 29,126 27,731
Total Equity incl. Minorities 27,536 25,447 23,389
Minority Interest 2,473 2,060 1,652
Liabilities
Non-Current Liabilities 1,518 1,518 1,518
Current Liabilities 2,204 2,161 2,824
Total Liabilities 3,722 3,679 4,342
Total Equity and Liabilities 31,258 29,126 27,731


Cashflow Statement
(in USD 000)
1971 1972e 1973e
Profit After tax 3,543 4,075 4,136
+ Depreciation 1,076 1,202 1,330
+ Interest paid 8 - -
Cashflow from operations 4,627 5,278 5,466
Change in working capital 977 (1,003) (34)
Net Cash from Operations 5,597 4,260 5,447
Capital Expenditure (2,624) (2,691) (2,400)
Change in Investment (76) (329) (366)
Net Cash from investing (2,681) (3,020) (2,766)
Dividend paid (2,061) (2,017) (2,047)
Net cash from financing (2,069) (2,017) (2,047)
Net Change in cash 848 (777) 634
Beginning cash 9,307 10,155 9,378
Ending cash 10,155 9,378 10,012



Valuation Ratios 1971 1972e 1973e
Consolidated EPS 0.47 0.46 0.40
Cash EPS 0.62 0.60 0.52
Book Value 3.13 2.92 2.72
Dividends 0.3 0.3 0.26
P/E 14.2 14.4 16.6
EV/EBITDA 7.8 8.1 9.0
Price/ Cash 10.7 11.1 12.7
Dividend Yield 3.9% 3.8% 3.9%
Price Book 2.11 2.26 2.43
ROE 15.4% 16.3% 15.1%
Net margin 23.7% 23.9% 23.0%
Asset turnover 0.6 0.6 0.6
Net debt/equity -36.4% -36.9% -43.4%
FCF 5.1% 2.3% 5.5%

Enterprise Value 1971 1972e 1973e
Market Capitalisation 52,800 52,800 52,800
Minus : Net Debt 10,012 9,378 10,155
Add: Minority Interests 2,473 2,060 1,652
Enterprise Value 45,261 45,481 44,297






GAULTYGER
WATERSTONES
GAUL T YGER WATERSTONES RESEARCH

March 12, 1971
Sterling Cooper Partners
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Within the last 24 months, Gaultyger Waterstones managed or co-managed a public offering (or 144A offering) of securities of Sterling
Cooper Partners, Sterling Cooper Draper Pryce.
Within the last 24 months, Gaultyger Waterstones has received compensation for investment banking services from Sterling Cooper
Partners, Sterling Cooper Draper Pryce.
In the next 3 months, Gaultyger Waterstones expects to receive or intends to seek compensation for investment banking services from
Sterling Cooper Partners, Sterling Cooper Draper Pryce.
Within the last 24 months, Gaultyger Waterstones has received compensation for products and services other than investment banking
services from Sterling Cooper Partners, Sterling Cooper Draper Pryce.
Within the last 24 months, Gaultyger Waterstones has provided or is providing investment banking services to, or has an investment banking
client relationship with, the following company: Sterling Cooper Partners, Sterling Cooper Draper Pryce.
Within the last 24 months, Gaultyger Waterstones has either provided or is providing non-investment banking, securities-related services
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