Omnicom Should Be On Value Investor & Activist Investors' Radar Screen

LONG OPPORTUNITY: OMC (NYSE)

INTRINSIC VALUE, EXCESS CASH &

ACTIVIST INVESTORS: 50+% UPSIDE

Disclaimer

1

The opinions expressed in this presentation by Lateral Capital Management, Inc. (“LMCI”) are not an

investment recommendation and are not meant to be relied upon in reaching an investment

decision. LCMI and its employees, consultants and contractors are not acting in an investment, tax,

legal or any other advisory capacity.

The opinions expressed herein address a limited number of aspects regarding a potential investment

in securities of the companies mentioned and are not a substitute for a comprehensive investment

analysis. Any analysis presented herein is illustrative in nature, limited in scope, based on an

incomplete set of information, and has limitations as to its accuracy.

LCMI recommends that potential and existing investors conduct a thorough investment analysis of

their own, including a detailed review of the companies' SEC filings, and consulting a qualified

investment advisor. This material is based on information obtained from sources believed to be

reliable, but the reliability of that source information.

Any opinions or estimates constitute a best judgment as of the date of this presentation and are

subject to change without notice. LCMI explicitly disclaims any liability that may arise from the use of

this material.

Executive Summary

2

Omnicom Group (“OMC”) has an impressive track record of earnings and cash flows

Its free cash flow generation during economic recessions is particularly impressive

A long-term campaign of stock buy-backs has contributed to per share outperformance

However, the OMC stock price has not outperformed the S&P500 Index and has a relatively high

equity beta

There are several factors behind this lackluster price performance

We consider the most likely candidates to be the excess cash holdings (which impairs economic returns)

as well as on-going corporate governance concerns

As well as a general market misunderstanding of the business drivers and relative performance record

Intrinsic value, trading comps and acquisition valuation all suggest the stock is 30% to 60%

undervalued

Major Board changes are due in 2018. Before then the company could take a number of steps

to enhance OMC’s relative stock price performance

A $2 billion stock buyback via a Dutch tender auction would signal to the market the intrinsic value of the

company

Continued reform of corporate governance arrangements are possible, even before the 2018 retirement

of the Executive Chairman

Failure to take these steps may draw additional attention from Activist Investors

Table of Contents

1. Fundamental Attributes

2. Stock Price Performance

3. Intrinsic Value

4. Contributing Factors?

5. Potential Catalysts?

6. Corporate Governance

7. Excess Cash

8. Activist Investors

9. Recap

Appendix: Valuation Assumptions

Section One

COMPANY FUNDAMENTALS

Revenues are Diversified by Industry And Geography

3

While servicing clients on six continents, OMS revenues are skewed towards the US and Europe

Figure 1 & 2

OMC Revenue by Industry OMC Revenue by Geography

Consistent Growth With Occasional Mild Downturn

4

Grey shaded areas represent US recessions

Figure 3

Even during the 2008/9

Financial Crisis, OMC

generated positive Funds

From Operations in excess

of $[1] billion

By investing capex pro-

cyclically and continually

buying back shares, OMC

improves its Free Cash

Flow during economic downturns

Share Buy-backs and Capex Are Pro-Cyclical

5

Part of the steady improvement in OMC’s per share economics is “financial engineering” made

possible by excess cash flow generation Figure 4

OMC Shares Outstanding

OMC’s ROIC Has Historically Been Almost Twice its WACC

6

The consistent generation of EVA over several decades is an impressive achievement; particularly during

economic downturns Figure 5

OMC Return on Invested Capital & EVA

OMC’s Peers Have Far More Volatile ROIC Results

7

OMC has improved both its ROIC and its EVA since 2015

Figure 6

Section Two

STOCK PRICE PERFORMANCE

OMC Has Not Historically Outperformed the Market

8

By outperforming the SPY in bull markets, and underperforming in bear markets, OMC has tracked

the SPY for decades. It remains to be seen whether the recent outperformance continues after the

next bear marketFigure 7

OMC Relative Share Price Performance

Its Equity Beta Is Relatively High For Such A Stable Company

9

OMC shareholders have historically seen the worst of both worlds – a stock price that doesn’t

outperform the broader market, combined with a higher risk profile Figures 8

The relatively high equity

beta also increases OMC’s

cost of equity and overall cost of funding

Section Three

INTRINSIC VALUE

Trades at a 20% to 45% Discount to its Large-Cap Peers

10

Figure 9

By consistently creating Economic Value Add (“EVA”) over several decades, there is a compelling

case for OMC to trade at a premium to its industry peers

Intrinsic Value Is 35% to 60% Above The Current Price

11

Figure 10OMC Unlevered Free Cash Flow - DCF Valuation – Base Case

DCF Valuation Sensitivities

12

The current OMC stock price is implicitly assuming that OMC revenues will grow at 0% per annum…

forever. Figure 11

OMC Unlevered Free Cash Flow : DCF Valuation Sensitivities : % change to current stock price

DCF Valuation – Monte CarloSensitivities

13

We ran 1,000 Monte Carlo simulations with random revenue growth rates for each projection year

between 2017 and 2022. A number of these simulations included negative growth rate projections Figure 12

OMC Monte Carlo Simulations: Revenue Growth Rate

The Average Monte Carlo Valuation Upside Was Over 40%

14

Even in the most extreme Monte Carlo revenue simulation downside scenario, there was a valuation

premium to the current OMC stock price of over 13% Figure 13

OMC Monte Carlo Simulations: Revenue Growth Rate

Relative Earnings Yield

15

The current earnings yield differential of 700 basis points over constant maturity ten-year Treasuries is

high by historical standards Figure 14

OMC Earnings Yield Spread Over Constant Maturity 10-Year Treasury Yield

Section Four

CONTRIBUTING FACTORS

Contributing Factors

16

Sections 4.1 to 4.4 are possible reasons for the current OMC mispricing. Sections 4.5, and 5 to 8 are

actions that OMC or third parties could take to reduce, or eliminate, the OMC mispricing Figure 15

Section numbers in Figure

15 are references to

sections of the original

written article on the

SeekingAlpha.com

website

OMC Risk/Reward Profile

Being a Serial Acquirer May Be a Factor

17

Figure 16

While OMC stockholders

face the risk of imprudent

acquisitions, the size and

frequency of the OMC

acquisitions is relatively

minor.

Goodwill has even

declined in recent years.

Acquisitions have not

been financed with

excessive net stock

issuance and the company

consistently uses low risk

earn-outs as a higher

proportion of the

potential purchase price

Extensive use of earn-outs (i.e. contingent purchase price payments) reduces the execution risks

associated with OMC’s acquisition program

Revenues are Highly Dependent on Global Growth

18

The pro-cyclical nature of OMC’s revenues may explain part of the stock price correlations with the

SPY Figure 17

OMC Revenue Sensitivity to Global Economic Growth

But OMC’s EVA is Not Correlated to Global Growth

19

The spread between ROIC & WACC is not driven by global growth. The stock valuation should

reflect this ability to generate positive EVA in all market conditions Figure 18

OMC ROIC & EVA Sensitivity to Global Economic Growth

OMC EBITDA Margin Is Counter-Cyclical

20

Revenue cyclicality does not flow through to CFFO and/or FCF because of working capital

management, counter-cyclical cost controls, pro-cyclical capex & stock buybacks Figure 19

OMC Revenues vs EBITDA Margin: 2001 to LTM

OMC Investors Can Outperform the SPY if Buying on a Dip

21

However, in 2002 the outperformance gains were all made within a couple of months after the

lowest stock price during the market downturn. Buying after this window of opportunity would have

resulted in almost no subsequent stock price outperformanceFigure 20

Trying to buy OMC at a

depressed price and/or

trading multiple requires impeccable timingOMC Relative Stock Price Performance vs S&P500 Index From Low Point In Each Market Downturn

Section Five

POTENTIAL CATALYSTS

Potential Valuation Re-rating Catalysts: Road Map

22

Intangibles Amortization Means a Strategic Buyer Is Less Likely

23

Figure 21

OMC only has $113

million in tax loss

carryforwards (as at

December 31, 2015) so a

338(h)(10) is unlikely.

Meaning the strategic

buyer cannot take

advantage of cash tax

(IRS) deductions for the

goodwill and/or intangible asset amortization

… and/or the large acquired goodwill impact on tangible book value will also deter some strategic

buyers

Leveraged Buy Out Valuation

24

Figures 22 & 23

The new owner can take

advantage of the goodwill

created from prior OMC

acquisitions of other companies.

To realize a 20% to 25% 5-year, pre-tax IRR, a generic LBO fund could afford to pay a 30+% premium

LBO Acquisition Leverage

25

Figure 24

The LBO acquisition should be able to rapidly de-lever in our base case scenario from around 6 times

EBITDA in 2016 to 3 times by 2020

LBO Valuation Sensitivities

26

If the LBO fund assumes it can exit the investment for the same EBITDA multiple as its entry price

(~13.5x EBITDA), but targeting a more realistic 15% to 20% IRR hurdle rate, it may offer as much

as a 60% premiumFigure 25

A 30% Offer Premium Is Viable Under Several Scenarios

27

Figure 26

Key Driver For Offer Premium Is Expected Synergies

28

OMC’s opex consists maily of salary, service costs, occupancy costs and SG&A

Figure 27

OMC LBO IRR Sensitivities

OMC Implemented a 10% O&M Cost Cut in 2009

29

Suggesting an LBO fund should be able to easily implement our base case 5% opex reduction

Figure 28

Whether a 10% opex

reduction has a

permanent impact on

OMC’s ability to generate

future revenues and cash flow is unclear

OMC Historical O&M

Section Six

CORPORATE GOVERNANCE

Investors Concerns Over Governance Remain Elevated

30

Despite appointing a lead independent director in 2015, 36% of OMC stockholders voted for an

independent Chairman in 2016 Figure 29

Section Seven

EXCESS CASH HOLDINGS

Section 7.1

How Much Cash?

Cash Balances as a % of Revenues Appear High

31

Management appears to be targeting a cash holding in the range of 10% to 20% of

annual revenues Figure 30

OMC Nominal and Relative Excess Cash Holdings

Cash Flow Seasonality Can be Dealt with via Credit Revolver

32

OMC currently has $3.5 billion of untapped revolving credit, in addition to its current $1.7 billion in cash

holdings. Normalized cash on hand is closer to $2.5 billion Figure 31

OMC Quarterly Cash & Equivalents Closing Balance

Working Capital Has Fluctuated In A Stable Range Despite OMC Growth

33

The rating agencies will not adjust excess cash in a their liquidity projections for anticipated working

capital needs if the company can drawn on bank lines Figure 32

OMC Quarterly Change in Working Capital

The Trend In OMC’s Cash Balance Is More Apparent On An Annual Basis

34

Corporate growth has been reflected in nominal end-of-year cash balance growth

Figure 33

OMC End of Year Cash Holdings

Section 7.2

How Much Liquidity?

Liquidity Components – Net Working Capital

35

OMC’s liquidity needs are being funded by its creditors to the tune of between $3 billion and $4 billion

per year; this is equivalent to > 20% of OMC’s annual revenues Figure 34

OMC Net Working Capital

Steady FFO Generation Also Contributes to Liquidity

36

Even in 2009, FFO declined 12% but was still a net positive. Contributing an additional $[1] billion of

liquidity during the worst economic downturn in recent times (i.e. 2009) Figure 35

OMC FFO & CFFO Annual % Change

Section 7.3

Benefits of Distributing Excess Cash

Section 7.4

Rationales For Holding Excess Cash

Are There Valid Reasons for OMC to Hold Excess Cash?

37

Figure 36

Section 7.5

Projected Liquidity

Projected Liquidity – Base Case

38

Figure 37

Projected liquidity is shown using “normalized” cash of $2.6 billion. CP issuance is not included

OMC Quantitative Liquidity Measures

Working Capital Association with Revenue Increases

39

Figure 38

The credit rating agency liquidity test includes a 15% EBITDA reduction scenario. In that scenario we

flat-line changes in Net Working Capital. However, OMC has historically been able to reduce working

capital needs, even when revenues were increasing

OMC: % change FFO vs $ Change in Net Working Capital: 2002 to LTM

Projected Liquidity Pro Forma For a $2 Billion Cash Distribution

40

Applying the more realistic cash balance of $2.5+ billion, suggests OMC could implement a $3 billion

stockholder distribution and still meet the credit rating agency liquidity tests

OMC Liquidity Tests

Figure 39

Projected Liquidity Pro Forma For a $2 Billion Cash Distribution

41

Monte Carlo simulations adjust the size of the credit facility, the amount of capex spend & other liquidity

variables as per the liquidity base case. All simulations are based on initial $1.5 billion cash balance

OMC: Monte Carlo Simulations: Revenue Growth Rate:

$1.5 billion Cash Holdings: 2017E Liquidity

Figure 40

Section 7.6

Pro Forma Leverage and Credit Rating Metrics

OMC is Conservatively Levered After a $2 bn Distribution

42

Figure 41

Distributive Excess Cash Leaves OMC Solidly Investment Grade

43

Figure 42

Moody’s: Quantitative Credit Rating Guidelines: Business & Consumer Service Industry

Section 7.7

Combined Impact of Major Market Correction & $2 billion Cash Distribution

Even After a “2008” Style Price Decline, Pro Forma Leverage is Moderate

44

Figure 43

Downside Scenario Without Excess Cash “Buffer”

45

Excess cash distribution moves OMC to its optimal cost of capital. Even a major market downturn

does not push OMC too far beyond this optima Figure 44

Section 7.8

Preferred Structure of Excess Cash Distribution

Merits of Various Options to Distribute Excess Cash

46

Figure 45

Given the extensive use of

option-based

compensation, a stock

buyback seems the most

likely of the three

alternatives for

distributing excess cash

Potential Stock Price Reaction Based on Buyback Premium & Trading Multiples

47

Figure 46

Section Eight

ACTIVIST INVESTORS

Large Caps are Increasingly a Focus of Activist Investors

48

Size and relative stock price performance are no longer major deterrents to activist investors. It is

increasingly common for funds to collaborate in a “wolf pack” when targeting larger companies Figure 47

Activist Campaigns Against Mega Cap & Large Cap Companies

There Are Several Reasons Why Activists May Target OMC

49

Governance concerns and/or excess cash holdings are two of the most common reasons why activist

investors initiate a campaign Figure 48

Section Nine

RECAP

Recap

50

OMC’s track record of above-market ROICs and EVAs is not reflected in its relative stock price

performance

Historically, many OMC stockhodlers would be better off buying a market ETF rather than the

high beta OMC stock

Which should not be the case for a company that performs as well, operationally

speaking, as OMC during economic downturns

Several valuation methodologies point to significant stock undervaluation at current price levels

In the upside valuation scenarios there is probably 60+% price appreciation

We considered the influence of OMC’s excess cash holdings and consider it a material drag on

financial performance without any commensurate benefits

A conservative $2 billion Dutch-tender stock buyback could signal to the markets the

extent of the current mispricing of OMC’s stock

Corporate governance reform has begun at OMC, although there are a number of additional

reform measures that could attract a wider audience of institutional investors to the OMC registry

Failure to implement a cash distribution and/or material corporate governance reforms could

draw the attention of a number of activist investors in 2017

Appendix

VALUATION ASSUMPTIONS

Operating, Valuation & Leverage Model Input Assumptions

A.1

www.lateralcap.com

[email protected]