S4 Capital plc (LSE:SFOR, Financial) (“S4”) is a well-financed digital advertising and marketing services company with operations spanning the Americas, Europe, the Middle East, and the Asia Pacific region. Headquartered in London, the Company operates across three segments; Content, Data & Digital Media, and Tech Services. Unique among peers, S4 provides a comprehensive offering to clients, combining expertise across digital advertising, data analytics, and digital transformation services. Furthermore, as a company newly formed in 2018 to operate exclusively within the digital advertising and marketing space, S4 is not burdened by a structurally declining traditional advertising business, as are its larger peers. S4 was founded and continues to be led by one of the world’s most successful advertising company entrepreneurs, Martin Sorrell. Sorrell and a highly experienced team of partners have rapidly built a formidable platform, benefiting from strong secular tailwinds, and have succeeded as a result of strong organic growth and the acquisition and integration of various digital media businesses. That said, S4’s success and growth have come with challenges, too.
A 2021 accounting restatement, even though the amounts ultimately proved to be largely immaterial, resulted in a fair amount of reputational damage and questions surrounding the robustness of financial controls and the strains of rapid growth. We believe the company has addressed past missteps with an impressive seriousness of purpose and an understanding that a reputational overhang on its share price could potentially impact its capacity to acquire companies and, therefore, its acquisitive business model. The Company brought in a new and highly experienced CFO and made a variety strategic hires to improve financial controls and audit functions at the practice, group, and board levels. After a precipitous decline in the share price, the Fund initiated a position in S4 Common at a discount to our estimate of intrinsic value. Going forward, we would expect the share price to eventually reflect the Company’s strong underlying growth prospects, margin expansion potential, deal-making acumen, and restored reputation.
From Third Avenue Value Fund (Trades, Portfolio)'s second-quarter 2022 letter.
