Last checked at 
* Publicis aims to boost growth after failed Omnicom merger
* CEO Maurice Levy bets on digital ads and marketing
* Sapient options unusually active before announcement
* Deal financed with existing cash and debt
* Publicis shares fall as much as 5 pct (Adds information about options moves before deal, additionalquotes from Levy)
By Leila Abboud
PARIS, Nov 3 (Reuters) - Publicis, the world'sthird-largest advertising agency, is to buy U.S.-based digitalad specialist Sapient for $3.7 billion in cash as itseeks to accelerate growth after a botched merger earlier thisyear.
The French group is hoping rapid growth in both NorthAmerican and Internet advertising, which are far outpacingEuropean and traditional ad formats, will help it catch up withsales gains at rivals such as WPP and Interpublic.
Chief Executive Maurice Levy has blamed Publicis' recentpoor performance on a failed merger with world No.2 ad agencyOmnicom, announced in August 2013 and abandoned in Mayover control and cultural clashes.
But some analysts said Publicis' offer of $25 per share, a44 percent premium to Sapient's closing price on Friday, was ahefty price for a company whose growth may have peaked.
The transaction, which followed an unusual rally in Sapientshares and options last week, could also dash hopes among theFrench company's shareholders that cash might be distributed tothem, analysts said.
Publicis shares fell 2.3 percent, while Sapient was up 42percent at $24.59 in early afternoon trading.
"A good asset at a steep price," said Exane BNP Paribasanalyst Charles Bedouelle of the deal, adding it would "likelypush back (Publicis') cash return story by two years."
UBS analyst Tamsin Garrity said Publicis had been underpressure from investors to return cash, and was expected toannounced share buybacks at a strategy day on Friday.
"The acquisition of Sapient makes such returns unlikely,"she added. Garrity has a neutral rating on Publicis shares.
Levy defended the decision, saying the company wouldgenerate more value in the long term by buying Sapient ratherthan buying back its own shares. He pledged to update investorson his approach to dividends and buybacks sometime in November.
"This operation is extremely important for securing thefuture of Publicis," Levy said. "It is far better to invest anddeliver a higher growth and higher profits ... which will leadto a re-rating, rather than simply buy back our own shares."
"The deal will create a foundation for accelerated growth"by giving Publicis access to new markets and revenues, he added.
Publicis said the deal would be financed through existingcash and new debt, and would not affect Publicis' credit rating.It did not say when it would add to group profits but forecast50 million euros ($63 million) in annual cost savings.
"A JILTED LOVER"?
Sapient's sales grew 14.1 percent to 1.1 billion euros lastyear, far outstripping Publicis' sales growth of 1.2 percent,though the French company had a higher operating profit margin.The U.S-based group earned 63 percent of its 2013 sales in NorthAmerica and has 13,000 employees, 8,500 of which are in India.
"The risk that growth slows at Sapient is one of thetransaction's more important considerations," said PivotalResearch Group analyst Brian Wieser.
He noted the deal gave Sapient an enterprise value (equityplus debt) of around 12 times its forecast earnings beforeinterest tax, depreciation and amortisation (EBITDA) for 2015,far above Publicis' current multiple of about 8 times.
Martin Sorrell, the chief executive of Publicis' rival WPP,was even harsher, telling financial blog Business Insider thatPublicis had rushed into the Sapient deal to compensate for itsbotched marriage with Omnicom.
"It looks like the behaviour of a jilted lover," saidSorrell, who often trades barbs with his cross-channel rival.
Levy responded on a later conference call that he did notthink Sorrell "knew anything about love."
"When it comes to love he should give that to the French,"he said.
Buying Sapient will speed Publicis' roughly seven year-oldeffort to earn more revenue from digital advertising, whichincludes everything from online marketing to brand building onsocial networks and automatic ad buying for major customers.
Last year, 38.4 percent of Publicis' sales came fromdigital, and it had been aiming to reach 50 percent by 2018,something that the Sapient deal will make happen immediately.
According to Zenith Optimedia, the digital ad market isexpected to grow 17.1 percent this year, driving total ad marketgrowth of 5.3 percent.
Sapient's main SapientNitro unit is a digital agency on apar with Publicis' Razorfish and WPP's AKQA with customersincluding carmaker Fiat, retailer Marks & Spencer and consumergoods group Unilever.
'SUSPICIOUS ACTIVITY'?
Sapient shares rose 20 percent last week ahead of the dealannouncement, compared to a 3.3 percent rise in the Nasdaq,prompting some market observers to question whether informationhad leaked. Trading in options in Sapient was also especiallyheavy.
"It looks like that there was some suspicious activity inSapient," said optionMonster.com lead analyst David Russell."Someone is definitely making a lot of money on this and theywere buying the calls right before the merger was announced."
Sapient boss Alan Herrick will continue to run the companyand join Publicis' management team, while Jerry Greenberg, theco-chairman of Sapient's board, will join Publicis' board.
The transaction is expected to close in the first quarter ofnext year. Citigroup has committed to financing the bid.
Bank of America Merrill Lynch and Rothschild advisedPublicis, while Goldman Sachs and Blackstone advised Sapient.
(1 US dollar = 0.8000 euro) (Additional reporting by Saqib Ahmed and Jennifer Saba; Editingby David Clarke, Mark Potter and Cynthia Osterman)
