Valassis Communications Inc has agreed to buy direct mail company ADVO Inc for $1.2 billion, hoping to broaden its marketing services and lessen its reliance on selling inserts for Sunday newspapers. Valassis shares fell 17 percent following the announcement of the deal on Thursday, and at least one broker, Prudential, cut its rating on the marketing company.
Under the terms of the all-cash deal, Valassis will pay $37 per share for ADVO, a premium of 52.5 percent over ADVO's closing stock price on Wednesday. Valassis will also assume $125 million ADVO debt.
Valassis, best known for the coupon inserts it produces and distributes in newspapers, struck the deal just weeks after cutting its 2006 earnings forecast alongside weakness in two key businesses. It has also suspended a share repurchase program and announced plans to seek strategic alternatives.
Part of the trouble in the marketing business has been the weakness of newspapers, where circulation has been steadily declining and companies have scaled back spending in favor alternative types of advertising. With ADVO, which focuses on direct mail advertising, Valassis hopes to broaden its business while gaining cost savings of $40 million starting in 2007.
The combination will also try to take advantage of the growing demand for targeted advertising, in which highly specific research on consumers is combined with specialised brand messages.
Industry observers pointed to rising interest in targeted advertising as one of the drivers behind the recent announcement that Interpublic Group of Cos. Inc will combine the creative advertising network Foote, Cone & Belding with the Draft direct marketing service.
Combined, Valassis and ADVO would have 7,900 employees, operate in nine countries and serve 20,000 advertisers world-wide. The combination will serve 94 of the top 100 advertisers in the United States.
While Valassis said the deal would add to profit in 2007 on a cash earnings per share basis, broker Prudential cuts its rating on the company to "underweight" from "overweight" on the belief that the deal will hurt earnings in 2006, 2007 and possibly 2008. The acquisition is expected to close in three to four months, subject to approval by regulators and ADVO shareholders, Valassis said.
Alan Schultz, Valassis chairman, president and chief executive officer, will retain those posts. S. Scott Harding, ADVO CEO, will become a consultant to the combined company. ADVO shares rose $11.39, or 47 percent, to $35.65 in morning trade on the New York Stock Exchange. Valassis shares fell $4.02 to $19.20, also on the NYSE.
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