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Valassis Will Acquire Advo to Create Co-op Mail Giant

Marketing services firm Valassis Communications Inc.’s intention to pay $1.3 billion for direct mail media company Advo Inc. is an item worth clipping.

The deal, made public July 6, will lessen coupon-driven Valassis’ reliance on the shrinking newspaper industry. It also creates a new co-op mail behemoth by pairing the largest direct mail media company with one of the nation’s largest newspaper-coupon distributors.

Wall Street thought little of the deal. It hammered the Valassis stock after the deal’s announcement. And consider this July 6 research note from Merrill Lynch that panned the acquisition’s rationality and the $125 million in Advo debt that Valassis will take over.

“In our view, VCI [Valassis] is paying a premium for a slow-growth company in an adjacent business and taking the risk of cost savings without any obvious revenue enhancement,” Merrill Lynch analysts said in the research report.

The deal has approval from each firm’s board of directors but awaits Advo shareholders’ nod and regulatory sign-off. It should close in three to four months.

Coupons to Mail

Valassis’ move comes as it faces growing competitive pressure in its core newspaper business.

The Livonia, MI, company filed an antitrust lawsuit this year against chief rival NewsAmerica Marketing. It was claimed that NewsAmerica unfairly bundled its newspaper-coupon offerings with in-store ad programs where Valassis has the main share.

Valassis offers newspaper-delivered promotions and ads such as inserts, sampling, polybags and on-page ads; direct-to-door advertising and sampling; direct mail; Internet-delivered marketing; loyalty marketing software; coupon and promotion clearing; and promotion planning and analytics services. Revenue last year was $1.1 billion.

Advo,Windsor, CT, is the nation’s leading direct-mail media company, with annual revenue of nearly $1.4 billion. The company’s technology and logistics helps retailers target, version and deliver their print advertising directly to consumers most likely to respond.

Strength in Numbers

Advo CEO S. Scott Harding said in a teleconference July 6 that the company had been thinking about how it could add to its product offerings.

With this deal, Mr. Harding said, “we have moved from basically one product offering to a [full] portfolio of products, which we are very excited about.” The merger also gives Advo better access to consumer packaged goods marketers.

Both companies said this deal would create the nation’s largest integrated media services provider, serving 20,000 advertisers worldwide, including 94 of the top 100 U.S. advertisers.

The combined company also will be positioned to capture growth across the expanded product and service portfolio, delivering customized, targeted solutions on a national, regional, ZIP code, sub-ZIP code and household basis. Advo’s shared-mail distribution business penetrates up to 114 million households, or 90 percent of U.S. homes, adding substantially to Valassis’ weekly newspaper distribution of 60 million households.

The combined company will have 7,900 employees with operations in nine countries.

“The ability to reach home-delivered newspaper subscribers – who are hosueholds’ primary shoppers – has always been highly valued by customers, but when you combine that ability with the capability to reach up to 114 million households on a sub-ZIP code level with the efficiency of shared mail, you clearly have an exceptional proposition for clients,” Alan F. Schultz, Valassis’ chairman and president/CEO, said in the teleconference.

Mr. Schultz said Valassis began talks with Mr. Harding late last year. The process accelerated this year, he said, and negotiations concluded July 5. The integration begins this week.

“We believe we can achieve synergies in print and paper, distribution costs, systems and processing and SGNA (sales and general administration expenses),” Mr. Schultz said. “We are confident in our ability to achieve $40 million in cost synergies, and we also expect significant reductions in capital expenditures.”

Expansion Is Game’s Name

A name for the merged Valassis and Advo has not been chosen.

“The name of the combined company has yet to be determined, but will be explored as we go through the integration process,” Valassis spokeswoman Mary Broaddus said. “Nothing will change until the deal is finalized.”

The combined company expects revenue of about $2.65 billion in calendar year 2007. EBITDA in 2007 is anticipated at $305 million to $315 million.

The firm will be based in Livonia and maintain a substantial presence in Windsor. Mr. Schultz will remain chairman and president/CEO while Robert L. Recchia will remain chief financial officer. Mr. Harding will serve as a consultant to the combined company. The Valassis board of directors will remain intact.

Mr. Schultz said the combined company would give consumers value and savings when, where and how they want it.

“Therefore, it is incumbent upon us to extend the reach of our value-oriented content to a digital platform,” he said. “We would also like to offer our customers more in-store media alternatives, and we expect to continue our investment in international expansion.”

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