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PARIS (Reuters) - Publicis and Omnicom plan to merge to create the world's biggest advertising group, worth $35.1 billion, a tie-up that could spur rivals to do deals to keep pace with big changes from technology and the Internet.
The companies said on Sunday the transaction - presented as a merger of equals - would bring the necessary scale and investment firepower to cope with rapid changes wrought by technology on the advertising business.
"This is a new company for a new world," Publicis Chief Executive Maurice Levy said.
"It will be able to face the exponential development of new internet giants like Facebook and Google, changing consumer behavior, the explosion of big data, as well as handle the blurring of roles of all the players in the market."
The transaction marks a return of jumbo-sized M&A among the world's 'Big Six' advertising groups, which have spent the past few years buying up much smaller targets in emerging markets and among web marketing specialists.
Other deals might now follow. Current leader WPP could make a move for U.S.-based Interpublic, France's Havas or Japan's Dentsu.
The new company - Publicis Omnicom - will be traded in New York and Paris. It will overtake WPP and have combined sales of nearly $23 billion and 130,000 employees. It brings together Publicis brands such as Saatchi & Saatchi and Leo Burnett with Omnicom's BBDO Worldwide and DDB Worldwide.
The French and U.S. company said shareholders in Publicis and Omnicom would each hold about 50 percent of the new company's equity.
Omnicom Chief Executive John Wren and Publicis CEO Levy will jointly lead the new company for the first 30 months, then which Levy will become non-executive chairman and Wren CEO.
The two veteran CEOs chose the neutral territory of the Netherlands for the new holding company.
It all began when Levy casually mentioned the idea of a merger to Wren at a social event in New York about six months ago. "I said it almost as a joke, but then once we each went back and reflected, it didn't seem so crazy," Levy said at a press conference at Publicis headquarters.
The two executives later brought in Rothschild Group to advise Publicis and Moelis & Company for Omnicom, choosing independent firms instead of larger banks in part to try to prevent leaks.
But when thorny issues cropped up in the talks, Wren and Levy settled things in one-to-one phone calls, the two men said.
Under the deal, Publicis shareholders will receive one newly issued ordinary share of Publicis Omnicom Group for each Publicis share they own, plus a special dividend of 1.00 euro per share.
Omnicom shareholders will receive 0.813 newly issued ordinary shares of Publicis Omnicom Group for each Omnicom share they own, together with a special dividend of $2.00 per share.
There is no premium involved in the merger, although Publicis was slightly smaller in terms of market capitalization than Omnicom. A person close to the deal said that the dividends were designed to bring the equity stakes to parity.
The groups said the transaction would create "significant value for shareholders", with expected synergies of $500 million. No job cuts are planned.
A tie-up of this scale, joining two distinct corporate cultures and management teams, is not without risk.
The new group will have to get antitrust clearance from authorities in around 45 countries. "We've looked at the antitrust issues very carefully and are not expecting anything that would prevent us from going forward," said Wren.
The main competition issue will be in media buying, where advertising agencies purchase TV or print ads on behalf of customers. Pivotal Research analyst Brian Wieser estimates that Publicis Omnicom will account for almost 20 percent of global media spending and closer to 40 percent in the United States.
To face such concerns, the groups might have to sell small brands in some countries, said the person close to the talks.
The other hurdle will be reassuring clients over conflicts that can crop up when an agency works for two competing firms in the same sector. For example, Omnicom has Pepsi as a major customer, while Publicis works for Coca-Cola.
Levy said both companies had years of experience setting up "strict firewalls" to protect clients' interests.
Even so, the deal is likely to create some instability as rival ad agencies try to poach clients while Publicis and Omnicom are distracted by the merger.
"This is going to cause turmoil within the industry," said a senior industry executive. "Everyone is going to reassess where they stand and every company outside of Omnicom and Publicis will be all over their clients during this period."
It is unlikely France will derail the deal despite the fact that a national champion is tying the knot with an American rival. Levy said the government had already expressed support for the merger.
Martin Sorrell, WPP chief executive, said he expects more deals to follow. "It's an extremely bold, brave and surprising move," Sorrell said in an interview on Sunday. "Further consolidation of our industry is inevitable."
Additional reporting by Nicola Leske in New York; Editing by Geert De Clercq and Jane Merriman