BRITISH marketing and advertising giant WPP is taking a majority shareholding in Sydney-based STW Communications Group (ASX:SGN) through a $512 million merger of its Australian and New Zealand operations.

The move formalises the joint working relationship the two companies developed almost two decades ago under the Singleton Ogilvy and Mather brand, which was later cemented when they brought it under the STW umbrella.

STW is an acronym representing the names of founder and advertising guru John Singleton, J. Walter Thompson and WPP, and it has become Australia's largest marketing services group. Singleton no longer has an interest in the company after selling his stake in 2007.

The deal, announced today, will create a business with annual revenue of $847 million and a combined workforce of 5500 as WPP takes a significant share of the advertising and corporate communications market in the region.

The merger allows WPP to leverage off STW's strong local base with Australia and New Zealand which is the company's biggest market behind the US, UK, China and Germany.

WPP chief executive Sir Martin Sorrell says the move will allow STW to 'focus on the Australian and New Zealand markets, which it knows best, with a structure that will strongly incentivise its people'.

Under the deal STW will be rebranded WPP Australia and New Zealand, bringing a host of brands, including GPY&R, TNS, Millward Brown, Hill + Knowlton Strategies and Burson Marsteller, under the WPP banner.

The joint interests of WWP and STW in Ogilvy, Ogilvy PR, J.Walter Thompson, Mindshare, Maxus and Added Value are included in the transaction, which STW says simplifies the ownership structure of these businesses.

"Bringing together the respective iconic brands and wonderfully talented people of STW and WPP Australia and New Zealand under a single common ownership will unlock tremendous local and global capability, experience and efficiencies for our clients as well as establishing a fantastic platform for our people to prosper," says STW chairman Robert Mactier.

He says the transaction is earnings-per-share accretive, largely due to the issue of new STW shares being at a premium to the prevailing market price and also due to synergy benefits. The merger is expected to lead to annual savings of at least $15 million a year for the combined group.

"I consider this a genuine win-win transaction for all our stakeholders," says Mactier. "Post completion, we look forward to working seamlessly with WPP as our major shareholder and strategic partner as we embark on the exciting journey that is in front of us."

STW chief executive Michael Connaghan describes WPP as a 'fantastic partner' over the past 17 years since creating the Singleton Ogilvy and Mather brand.

"Since then we have had great success in Australia and New Zealand partnering in J Walter Thompson, Added Value, Mindshare and Maxus.

"I believe this deal makes great sense. To finally align our shareholdings in those existing partnerships and now to expand our relationship across the full STW and WPP Australia and New Zealand portfolio of companies is an amazing opportunity.

"We have the potential to create a group unparalleled in this part of the world, totally focused on our home markets, but allowing our clients and people open access to best thinking on a global level."

Under the terms of the deal, WPP will be issued 423 million new STW shares at 91.5c a share for a total of $387 million, valuing the transaction at 7.4 times EBIT. This will lift its shareholding in STW to 61 per cent.

The issue price is at a 30 per cent premium to the 10-day weighted average price of STW shares, although the STW stock price is well down from the $1 at which it was trading this time last year.

STW will assume an extra $125 million in net debt following the transaction, bringing total group debt to $338 million as at September 30, on a pro forma basis.

The transaction is subject to STW shareholder approval, as well as approvals from the Foreign Investment Review Board and the competition watchdog, ACCC.

Connaghan will remain CEO of the group following the merger, which is expected to be completed in the first quarter of calendar 2016.

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