WPP Alleges "Secret Payments" Spoiled Deal With George Patterson, Communications Group

WPP is suing a private equity firm and the directors of Australia’s George Patterson and The Communications Group agencies over an $80 million deal struck in 2005 that has since gone wrong, the Sydney Morning Herald reports. The agencies are known for the world famous Foster’s beer campaigns.

The case is the second recent one in which WPP boss Martin Sorrell and his lieutenants claim they were allegedly gulled out of money when taking a stake in an agency. In April, BNET noted that WPP was suing Spot Runner for $54 million in alleged secret stock sales that went against an agreement between the TV ad buyer and the holding company.

It’s also the second case in which the defendants claim that WPP was told exactly what was happening with its acquisition, even though WPP claims it was not privy to “secret” machinations that have harmed its stakes.

Down under, WPP alleges that when it bought a controlling stake in George Patterson and its parent, The Communications Group, from Pacific Equity Partners, it did not know that Pacific had made $1.5 million AUD in “secret payments” to executives at George Patterson to stay on for at least a year after the deal. Had WPP known the executives were likely to leave once the payments ended, the company would have paid much less for the agency, WPP alleges. The Herald:

In August 2005 WPP paid $80 million to PEP for the remaining 70 per cent of TCG, which included, among others, the media buyer Zenith and the venerable ad agency George Patterson. The action was initiated in November 2006.

The payments were made to the senior agency executives Anthony Heraghty and James McGrath, the brains behind the award-winning Fosters’s ad campaigns. The payments were aimed at buying their loyalty to remain at the agency for a year after the sale.

WPP believes that if Heraghty and McGrath had stayed on then George Patterson would not have lost clients such as Foster’s, National Australia Bank and Cricket Australia. WPP unit Y&R Brands seeks $10 million in damages from PEP, McGrath, Heraghty, et al.

The defendants claim that WPP knew all along about the payments, according to The Age:

The defence claims [PEP director Tim Sims] telephoned Hamish McLennan - then the most senior WPP executive in Australia - to get his approval of the strategy and to raise the possibility of the payments.

Another call was placed by Mr Sims to Mr Hamill telling him they had agreed to stay at the agency.

Mr McLennan and WPP have denied the conversations took place.

In the Spot Runner case, the bosses at the agency claim that:

WPP and other preferred shareholders were given notice that the sales were occurring, and they had the opportunity to participate in the sales. In fact, WPP signed various documents acknowledging this opportunity.

• Previous litigation troubles at WPP:
• WPP Accuses Spot Runner of $54 Million Scam; Was Sorrell Asleep at the Wheel?