Two Into One Just Won’t Go

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By: Jennifer Saba

Well, that was quick. After trying to convince analysts and investors that a merger would be a good thing, Valassis and ADVO have turned on each other, going for the jugular. Now they are due to hook up in December ? in court.

On Aug. 30, Valassis played the role of suspicious lover, filing a lawsuit against ADVO in the Delaware Court of Chancery claiming fraud and misrepresentation, among other things. The Livonia, Mich., marketing research company, best known for its free-standing insert business, rescinded its $1.3 billion offer to acquire ADVO. According to the filing, Valassis alleges that “ADVO’s senior management intentionally provided Valassis with materially false financial information, made positive representations about the health of the business with no factual basis, withheld material information, and fabricated projections.”

Valassis and ADVO declined comment to E&P, citing the pending suit.

But that hasn’t stopped the press releases from flying. ADVO, the Windsor, Conn.-based direct mail company and sometime newspaper nemesis, refused to let Valassis reveal pertinent facts in the lawsuit since both companies had signed non-disclosure agreements during the due-diligence process. As such, Valassis released to the public a redacted version of the filing, with gaping holes. The scant information prompted Steven Barlow, an analyst with Prudential Equity Research, to write: “We can’t help but think about the Nixon White House tapes.”

Shortly thereafter, ADVO filed a counter suit against Valassis and said it was going forward with a meeting to vote on the deal, which shareholders approved ? despite the bad feelings ? on Sept. 13.

A court date has been set for Dec. 11. The court also approved a less redacted version of the complaint for release.

Valassis’ allegations hinge on the charge that ADVO executives inflated profit projections. According to court documents, ADVO allegedly missed its third-quarter operating income by 32% from the original forecast. ADVO executives, Valassis claims, had presented April and May numbers as actuals, while in reality they were half-baked.

Meanwhile, according to court documents, ADVO expects to miss its operating income projections for the fourth quarter by $5 to $6 million.

By reading the calendar, Prudential’s Barlow believes ? for now, at least ? the cards are stacked in Valassis’ favor. ADVO had lobbied for an earlier court date since a financing commitment from Bear Stearns expires at the end of November. “Dec. 11 is certainly pro-Valassis,” Barlow wrote.

Others in the financial community are sitting back and waiting. Deutsche Bank analyst Paul Ginocchio, in a note covering ADVO, wrote about two likely scenarios (at least in terms of the stock): ADVO wins and the merger is enforced at $37 per share, or Valassis wins and ADVO trades on “the fundamentals.” Taking into account the legal remedies due to Valassis and/or shareholders, Ginocchio estimates $24 per share.

Meanwhile, the lawyers have descended. In mid-September, Radnor, Pa.-based law firm Schiffrin & Barroway filed a class action lawsuit against ADVO, looking for lead plaintiffs.

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