Valassis Communications Inc. snaps up Advo for $1.3B

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Valassis Communications Inc., a marketing services company known for its newspaper inserts, direct shared mail advertising, coupon promotions and sampling promotions, announced late last week it has agreed to acquire direct mail media giant Advo in a transaction worth $1.3 billion.

Under the agreement, Livonia, Mich.-based Valassis will acquire all outstanding common shares of ADVO stock for $37 per share in cash.

ADVO, based in Windsor, Conn., reaches 114 million households, or 90% of U.S. homes, with its shared mail business. That reach will be combined with Valassis' weekly newspaper insert distribution business to more than 60 million households. The combined entity will represent the largest integrated media services provider in terms of reach: The companies combined will reach about 20,000 advertisers, including 94 of the top 100 advertisers in the U.S.

"Since I took over as CEO eight years ago, I have believed that a Valassis/Advo combination was compelling," said Alan Schultz, chairman and president-CEO of Valassis, in a webcast announcing the deal. "The Advo shared mail business model is very similar to the FSI [free-standing insert] model, and therefore one which we understand exceptionally well."

He said that Advo's national footprint would have been difficult to duplicate and that, by acquiring it, Valassis will be able to add content to Advo's shared mail package. Schultz said that despite paying a premium for Advo, he feels the deal has significant value given the cost synergies he expects next year.

The move fits Valassis' intention to diversify its product mix and its distribution channels beyond newspapers.

"Clearly a larger percentage of our revenue is generated from newspapers than what we like," Schultz said during the webcast. "This combination substantially reduces the percentage of revenue in the future that we'll generate from newspapers. We don't necessarily think that's a bad thing."

Analyst Lauren Rich Fine did not have a positive view of the deal.

"In our view, VCI is paying a premium for a slow-growth company in an adjacent business and taking the rist of cost savings without any obvious revenue enhancement," Fine said in an e-mail regarding the deal. "We like the enhanced leverage on the balance sheet, but do not believe the acquisition addresses the problems VCI is having with its FSI operations or how the company is going to compete online." Valassis has been in a longstanding price war with News America and its FSI business.

Scott Harding, CEO of Advo, said the deal gives both companies plenty of potential for revenue growth.

"Given the fact that we have virtually no overlap with product and very little overlap with clients, we have a great cross-selling and upselling opportunity. There's no doubt there's revenue growth with that." Harding said the move will help Advo diversify its customer base more expeditiously.

"Without a doubt, through this process, we've discovered that Valassis has great relationships within categories and specific advertisers that, frankly, we've not been able to penetrate," Harding said.

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