Valassis to Acquire Advo for $1.3 Billion

Deal Marries Coupon, Direct-Mail Giants

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CINCINNATI ( -- Valassis Communications is buying direct-mail power Advo in a deal aimed at lessening the acquirer's dependence on the shrinking and competitively brutal newspaper-coupon industry while increasing Advo's presence with package-goods marketers.
The purchase will lessen Valassis' reliance on coupons
The purchase will lessen Valassis' reliance on coupons

Valassis said it would acquire Advo for $37 a share in a $1.3 billion debt-financed deal that the companies said would be highly complementary by pairing the largest direct-mail media company with one of the largest newspaper-coupon distributors in the U.S.

Stock plunge
But investors, rating services and analysts hammered the stock, which plummeted 15.6% to $19.57 on the New York Stock Exchange. Moody's said before the market closed that it was considering lowering Valassis' bond rating; Standard & Poor did so after market close, from BBB-plus to BBB.

Prudential Securities slashed its rating of Valassis two notches from overweight to underweight, saying the deal would dilute the company's earnings through 2008 and that it wasn't impressed by Advo's revenue growth potential.

The move comes at a time when Valassis faces growing competitive pressure in its core newspaper business, which it for years has been diversifying beyond into its own direct-mail and electronic-direct-marketing services.
Earlier this year, Valassis filed an antitrust suit against rival NewsAmerica Marketing, claiming the News Corp. unit unfairly bundled its newspaper-coupon offerings with in-store advertising programs where it has a commanding share. NewsAmerica earlier this year also started distributing two coupon circulars some weeks, eliminating the need for some marketers to put coupons in Valassis' books just to avoid competitive conflicts.

Better package-goods access
Late last year, industry heavyweight Procter & Gamble Co. consolidated its coupon distribution business with Valassis following its own acquisition of Gillette Co., but got price concessions so large that Valassis had to reduce its revenue and earnings outlook for this year.

In a conference call, Valassis Chairman-CEO Alan F. Schultz, who will lead the combined companies provided the deal is approved by Advo shareholders and regulators, said it will help Valassis diversify and give Advo better access to package-goods marketers the company has had trouble reaching in the past.

Mr. Schultz noted the impact declining newspaper circulation is having on coupon distribution, saying: "Clearly a larger percentage of our revenue was generated from newspapers than what we like, and clearly this combination substantially reduces the percentage of revenue in the future that we'll generate from newspapers."
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