ADVO Planning to Press on With Shareholder Meeting on Valassis

By: Jennifer Saba ADVO said today it plans to go forward and hold the special shareholder meeting scheduled on Sept. 13 on the proposed acquisition by Valassis. Proxy materials are being sent out with the board of directors? unanimous recommendation that ADVO stockholders vote ?for? the deal.

The announcement is the latest defense volley from the Windsor, Conn.- direct mail company since Valassis filed a surprise lawsuit against ADVO on Aug. 29.

Valassis released a redacted version of the suit late last week claiming ADVO misled executives and withheld pertinent financial data regarding its $1.3 billion offer to buy ADVO.

Valassis executives posit that ADVO senior management ?intentionally provided Valassis with materially false financial information, made positive representations about the health of the business with no financial basis, withheld material information, and fabricated projections that they knew were unachievable and which falsely portrayed ADVO as a robust organization capable of supporting a valuation of $37 per share,? according to court documents.

The lawsuit disclosed that Valassis had been wooing ADVO since November 2005 about a possible merger but serious talks didn?t get underway until the end of March. ADVO gave Valassis access to financial information by way of a data room but ?insisted? on an ?aggressive schedule.?

?In sum, everything shown to Valassis representatives confirmed the rosy picture previously painted by ADVO senior executives to Valassis. Every concern was explained away as a problem that had been solved or addressed,? according to court documents.

Because parts of the documents were withheld, it is difficult to surmise exactly when Valassis had a change of heart. Not even the sentence ?after the merger is executed, the truth begins to emerge? offers any guidance since two blank pages follow the statement.

As Prudential Equity Analyst Steven Barlow points out in note: ?We can?t help but think about the Nixon White House tapes and the words deleted.?

Meanwhile, ADVO remains committed to the deal. In a letter addressed to the Valassis board of directors, ADVO Chairman John Mahoney and CEO Scott Harding said that Valassis is ?suffering from a severe case of ?buyer?s remorse,? arising from the negative reaction by Valassis stockholders and analysts to the announcement of the transaction, and perhaps exacerbated by Valassis? own financial weakness.

?For Valassis to try and back out of its binding merger agreement less than two months after it was signed, on such flimsy factual pretext in the face of compelling legal precedents on ADVO?s side, will raise substantial and lasting concerns among investors and the financial community generally regarding the credibility and competence of Valassis management.?

Prudential Equity Research raised its rating on Valassis from ?underweight? to ?neutral? citing that an ?enormous amount of pressure? has been lifted related to the acquisition. Prudential notes several risks including the possibility of the court not ruling in favor of Valassis allowing the merger to go through.