Cash flow and balance sheet
A summary of the Group's unaudited cash flow statement and balance sheet and notes as at 30 June 2008 are provided in this report.
In the first half of 2008, operating profit was £378 million, depreciation, amortisation and impairment £125 million, non-cash share-based incentive charges £30 million, net interest paid £67 million, tax paid £84 million, capital expenditure £74 million and other net cash inflows £11 million.
Free cash flow available for working capital requirements, debt repayment, acquisitions and share repurchases was, therefore, £319 million. This free cash flow was absorbed by £176 million in net cash acquisition payments and investments (of which £100 million was for initial acquisition payments net of disposal proceeds, £30 million was for earnout payments, £43 million for investments and the balance of £3 million related to prior-year loan note redemptions), and £112 million by share repurchases, a total outflow of £288 million. This resulted in a net cash inflow of £31 million, before any changes in working capital.
Average net debt in the first six months of 2008 rose by £621 million to £1,873 million, compared to £1,252 million in 2007, at 2008 exchange rates. On 30 June 2008 net debt was £1,857 million, against £1,264 million on 30 June 2007, an increase of £593 million. These figures reflect the level of acquisition activity and share buy-backs for the previous 12 months. Your Board continues to examine ways of deploying its EBITDA of over £1 billion (over $2 billion) and substantial free cash flow of over £700 million or over $1.4 billion per annum, to enhance share-owner value, given that interest cover remains strong at 7.1 times in the first half of 2008. As necessary capital expenditure, mainly on information technology and property, is expected to remain equal to or less than the depreciation charge in the long term, the Company has continued to concentrate on examining possible acquisitions, such as the offer for Taylor Nelson Sofres plc (TNS) or returning excess capital to share owners in the form of dividends and/or share buy-backs.
In the first half of 2008, the Group continued to make small-sized acquisitions or investments in high-growth geographical or functional areas. In the first six months of this year, acquisitions and increased equity stakes have been concentrated in Advertising and Media Investment Management in the US, the UK, France, the Netherlands, Switzerland, Ukraine, the Middle East, Chile, Guatemala and China; in Information, Insight & Consultancy in the US, the UK, Spain and India; in Public Relations & Public Affairs in the UK and China; in direct, internet and interactive in the US, China (digital), India, Japan (digital) and Malaysia.
On 9 July, WPP announced an offer to acquire the whole of the issued share capital of TNS, on the basis of 173p in cash and 0.1889 of a WPP ordinary share for every TNS share. Based on the latest WPP closing share price of 475.5p per share, WPP's offer values a TNS share at approximately 263p and values TNS at approximately £1.1 billion.
In addition to increasing the interim dividend by 20% to 5.19p per share, the Company continues to focus on examining the alternative between increasing dividends and accelerating share buybacks. Consistent with the objective, announced in 2006, of increasing the share buy-back programe to |4-5% of the Group's share capital in 2007 and 2008, 18.8 million ordinary shares, equivalent to 1.6% of the share capital, were purchased at an average price of £5.96 per share and total cost of £112.2 million in the first half. All of these shares were purchased in the market and subsequently cancelled. Such annual rolling share repurchases are believed to have a more significant impact in improving share owner value, than sporadic buy-backs. The Group is currently running at an annual rate of share buy-backs of slightly over 3%, partly reflecting the requirement to withdraw from the market in the midst of the bid for TNS, the earliest skirmishes of which started at the beginning of May.