Will Cordiant's boss be back after the break?

Michael Bungey is used to getting out of scrapes, and he'll have to do it again at the troubled ad group

When Cordiant Communications reports its half-year results this Friday, it is unlikely the champagne corks will be popping. Turnover at the advertising and marketing group is expected to be down around 11 per cent, and the prospect of more cost-cutting measures is becoming increasingly likely.

However, should shareholders be offered a glass of bubbly, they might drink deep as they recall the track record of chief executive Michael Bungey and his experience of coming through tight financial scrapes. When he ran his own advertising agency two decades ago, and the piggy bank was almost empty, he had an unusual solution. He used the last of the money to throw an upmarket champagne party, inviting the great and good. The event went well, and four of the guests ended up becoming clients, so saving the company.

Cordiant may not be bankrupt. But it could do with an extra client or four. Times are hard for ad agencies because companies have become less keen to advertise over the past two years, and competition for clients is now fierce.

At Cordiant, the pain has been exacerbated by a hangover from an exuberant acquisition spree. In 2000, when economic times were better and prices were high, the company spent £279m buying Lighthouse Global, the owner of PR firm Financial Dynamics, and £113m on Healthworld, a healthcare consultancy. It also forked out £32m for MicroArts Corporation, an American e-commerce consultancy whose performance since then has mirrored the rest of the dot-com sector.

Burgeoning debts from the Lighthouse purchase have already forced the company into a humiliating concession to its banks, when the terms of its loans had to be renegotiated earlier this year. The interest rates were hiked up and the banks now control dividend policy and the use of cash in the business. Meanwhile, some analysts think the company won't be able to stick to the new loan terms.

"Our big concern is that Cordiant will breach its banking covenants shortly," says Johnathan Barrett, media analyst at stockbroker Teather & Greenwood. "We have seen a major deterioration in the advertising market since the refinancing, and any loss of revenue is felt very quickly."

The company officially denies this is a risk, though some insiders are less certain. Similarly, after a series of profits warnings last year, and a miserable trading update in June, investors are not optimistic. Some say the only hope is a bid from a rival ad company. But there have been expectations of this for the past five years, which have never been realised. Mounting gloom has brought the share price down: in the past few weeks it has reached an all-time low of 49p.

The share slide has attracted eagle-eyed investors, though some are not welcome guests. The corporate raider Active Value, run by Julian Treger and Brian Myerson, has decided the company is easy prey and has built up a 9 per cent stake. It is believed that Mr Treger and Mr Myerson intend to increase their holding, call for an emergency general meeting and push for management changes.

They have yet to win the hearts and minds of other shareholders, and some observers question their rationale. "Due to agencies' heavy cost bases, they need to be run particularly well financially to make them capable of dealing with downturns," says Mr Barrett. "To turn Cordiant around would require time. I don't see what Active Value can do to turn it round quickly ... The bankers are already partly in control now."

Some investors are more supportive of the current management team. David Herro, a fund manager at Chicago-based investment firm Harris Associates, knows the company well as he was a shareholder when Cordiant was part of Saatchi & Saatchi in the early 1990s. Although he sold his tranche of Cordiant shares in 1999, when the price was high, he has been buying up a 10 per cent stake over the past six months because he thinks the valuation is attractive. "Its immediate-term financial strains are behind it," he says. "It does have liquidity that can be had in asset sales. There are a lot of things it can do if it is ever put in a bind."

Mr Herro points to a 25 per cent stake in media buyer Zenith Optimedia as an attractive asset that could be sold easily if the financial stakes were high – though at Cordiant any thought of selling assets in a recession is seen as "crazy".

Despite the support of investors such as Mr Herro, speculation is increasing about the future of Mr Bungey. Under his management, the group's greatest failure, apart from its expensive acquisitions, is said to be the disappointing performance of the US division of Bates, the worldwide agency that came up with the "You can do it if you B&Q it" adverts.

Clients are like gold dust at the moment, but Bates has managed to lose four key ones in the States. Burger retailer Wendy's has jumped ship, as has the American division of Hyundai. Also departed are CVS, a healthcare company, and the recruitment division of the Department of Defense – probably the only booming industry in the US at present, apart from class action law.

A departure from the business would be seen as a sensible retirement for Mr Bungey. He is 62 and has just recovered from a hip replacement operation.

Speculation is particularly rife after the appointment of David Hearn to sort out the Bates USA division. It is believed that Active Value wants him on the board as chief operating officer, and some observers see this as a grooming role, in which he will learn more about the advertising trade before taking on the top job.

Otherwise known as "Pavarotti", due to his rotund shape and abundant facial hair, Mr Hearn is a financial operator but has little experience of advertising. He joined from Goodman Fielder, an Australian foods business, where he was chief executive.

"He has been brought in as an heir apparent," says one source close to the company. "But there are no plans immediately to bring him in as chief executive."

Shareholders may not be keen for this newcomer to be given the reins just yet. Mr Hearn spent his six years at Goodman restructuring the company, but his parting shot was a set of financial results with a net loss of A$78.3m (£28m).

For the short term, at least, Mr Bungey has the conditional support of the major shareholder. "He is a very hard-working guy," says David Herro. "He cares very much and is a good advertising person."

But is he a good chief executive? "That remains to be seen," Mr Herro replies, rather enigmatically, given that Mr Bungey has been in the job for five years.

And if the rumourmongers are right, he has little time left in which to prove himself.