Valassis Goes ‘Postal,’ Picks Up ADVO

By: Jennifer Saba

Valassis finally put to rest years of rumors and speculation when it agreed to acquire ADVO for approximately $1.3 billion on July 6.

Since the announcement, executives at both companies have been busy selling the marriage as one of love rather than convenience. “Since I took over as CEO eight years ago,” said Valassis chief Al Schultz during a mid-July conference call, “I have believed that a Valassis/ADVO combination was compelling.”

Management at Valassis, the company known for producing and distributing free-standing inserts in newspapers, and ADVO, a direct-mail company and tough competitor for the newspaper industry, maintains the combination will give advertisers more options. The combined company ? the deal is scheduled to close in late October ? will serve 20,000 global advertisers, including 94 of the top 100 in the United States.

Of course, the fact that advertisers will have more choices has raised some eyebrows about the impending union. The fear is that Valassis will start steering its clients to use direct mail rather than to newspapers.

That concern was voiced by newspaper management during quarterly conference calls that took place a week after the deal was announced. McClatchy CEO Gary Pruitt called the deal a “warning sign” for the industry, and added, “ADVO obviously is a distribution company, and that gives Valassis new options.”

Other newspaper executives are sitting back to watch Valassis’ next move. At Gannett, Executive Vice President/CFO Gracia Martore said during a 2Q results call that the audience base of the two companies makes for a nice match. And Gannett’s not wringing its hands over ADVO’s acquisition just yet. Martore stressed during the call that “The audiences we provide to Valassis are uniquely important.” ADVO has alliances with 28 papers.

Still, analysts are not thrilled about this new union. “We are not yet fully comfortable that buying ADVO won’t upset some of Valassis’ newspaper partners, which could ‘de-activate’ themselves from Valassis’ network and work exclusively with News America,” wrote Deutsche Bank analyst Paul Ginocchio. News America, Valassis’ main competitor, has been cutting its prices, making it a cheaper option.

The consumer packaged-goods industry is a sizable client of Valassis, representing about 43% of its revenues. These clients pay Valassis to produce and distribute FSIs, and Valassis, in turn, places them in newspapers acting as a media agency. The company also provides sampling and polybagging programs. Valassis works with 13,000 newspapers with billings north of $300 million.

Valassis Vice President of Strategic Sourcing Bill Blackmer assures E&P, “There may be some perception that we are going to abandon the newspapers. This is nothing further from the truth. Let’s remember, 80% of [our] revenue is derived from newspapers. We are just not going to throw that away.”

Schultz says the real issue at hand is the decline of newspaper circulation. By acquiring ADVO, Valassis is mitigating its risk by branching out into other forms of media. “Home-delivered newspaper subscribers are really the gold standard in what customers are looking for. With circulation somewhat under attack,” he acknowledges, “we need to make sure we put ourselves in a position where we can deliver the penetration level our customers need, regardless of distribution method.”

Schultz explains that home-delivered newspaper subscribers, with a non-subscriber, shared-mail program, is a “win” for everyone. It will allow Valassis to go after more marketing and advertising dollars, he says, and, “I would be totally shocked if a newspaper wanted to stop distributing any of our content. We are in an environment where newspapers are struggling to maintain circulation levels. For a newspaper to tell us they don’t want to distribute FSIs anymore would be equivalent to partial suicide.”

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