Valassis and Advo Trial - Outcome

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At Trial, Valassis CEO Says Advo Held Back Key Info on Finances

Published: December 11, 2006 10:35 PM ET at www.editorandpublisher.com

WILMINGTON, Dela. Executives of Advo Inc. withheld information about the finances of the nation's largest direct mail marketer before the company agreed to be acquired by Valassis Communications Inc., the chief executive of Valassis testified Monday.

Alan Schultz was the first witness called in the trial of a lawsuit in which Livonia, Mich.-based Valassis is seeking to back out of a $1.3 billion acquisition of Advo announced in July.

Valassis has accused Windsor, Conn.-based Advo of withholding and fabricating financial information. Advo has countersued in the Delaware Court of Chancery, saying Valassis is simply suffering from buyer's remorse and is trying to drive down the purchase price.

Vice chancellor Leo Strine Jr. will determine after the trial, which is expected to take two weeks, whether the deal should go through. Strine is the same judge who in 2001 rejected an attempt by Tyson Foods Inc. to nullify its $4.7 billion acquisition of IBP Inc., a South Dakota-based beef and pork distributor. Tyson argued that a "material adverse change" had occurred in IBP's circumstances and altered its long-term value. IBP countered that Tyson had buyer's remorse.

Advo shares closed down 84 cents at $29.01 in trading Monday on the New York Stock Exchange, while Valassis shares rose 21 cents to $16.46.

Schultz testified that in a May meeting with Advo officials, Advo Chief Financial Officer Jeffrey Epstein failed to disclose that the company had downgraded its forecast for 2006 earnings before taxes to $54 million from $76 million.

Instead, Epstein said changes made by Advo to a February business forecast, when the companies were still exploring a merger of equals, were "minimal," and expressed "tremendous confidence" in Advo's 2007 forecast, Schultz said.

"My takeaway was that 2007 was a number we could take to the bank. Of course, literally we were going to do that," Schultz said.

Schultz was unaware that Advo sales and marketing executive Stephanie Molnar had told her board two weeks earlier that the company was facing challenges with data needed to develop a realistic business forecast.

"It certainly would have made me question Jeff Epstein's presentation, because obviously his presentation was totally opposite of what Ms. Molnar was talking about two weeks sooner," Schultz said.

Schultz also said he was never told about an e-mail sent by Epstein the day before Valassis agreed to acquire Advo, in which Epstein informed colleagues that Advo's postal expenses for the most recent quarter had been understated by $1.5 million. Schultz said the discrepancy amounted to overstating $9 million in operating income on an annualized basis, and represented a valuation of $171 million based on the premium Valassis was paying for Advo.

"They had extracted every penny they possibly could out of us," Schultz said, adding that Valassis officials were shocked when they learned in late July that Advo would come up at least 30 percent short in operating income for the quarter ending in June.

"The June miss would have had to been absolutely spectacular to miss by that much," said Schultz, who directed a team of Valassis officials to investigate the numbers they had been given.

"The bottom line is at this point, they suspected that a fraud had taken place," he said.

Under cross-examination by Advo attorney George Conway, Schultz admitted that he had long thought as Valassis CEO that a consolidation of the marketing services industry would be beneficial, and that Advo seemed to be a good fit for Valassis.

Valassis relies heavily on freestanding advertising inserts, such as those delivered with newspapers and in consumer packaging. Advo, in contrast, specializes in direct mailings that often compete with newspapers in the distribution of preprinted advertising.

"You made it clear that you were pretty eager to do a deal, correct?" Conway asked Schultz.

Conway noted that Schultz had told his board that a long, drawn-out sale process could hurt employee morale and motivation, and that he told Advo CEO Scott Harding he wanted to move quickly. Schultz pursued the deal even after Advo missed its second-quarter earnings mark and Citigroup downgraded its rating for Advo, Conway said.

Schultz replied that Harding assured him Advo had taken steps to respond to ad cancellations in late 2005 that hurt the company's performance.

Conway pointed out to Schultz that his own company adjusted its earnings guidance in June and has missed its earnings per share target for three consecutive quarters.

"Sometimes we make a prediction in business and it turns out to be wrong, right?" Conway asked Schultz.

"Yes," Schultz replied.

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WILMINGTON, Del. (AP) - Being forced to go through with a deal to buy direct mail marketer Advo Inc. for $1.3 billion would dilute the stakes of its shareholders, Valassis Communications Inc. Chief Financial Officer Robert Recchia testified Wednesday.

On the witness stand in the third day of the trial of Valassis' lawsuit seeking to escape the deal, Recchia said Livonia, Mich.-based Valassis' would have to issue shares to raise money, which would dilute existing shares.

According to the CFO, Advo's financial results would not support cheaper debt or bank financing for the deal. That means Valassis would be forced to sell equity to close a transaction that it no longer wants, Recchia said.

Valassis has accused Windsor, Conn.-based Advo of withholding and fabricating financial information. Advo, the country's largest direct mail marketer, has countersued in the Delaware Court of Chancery, saying Valassis is simply suffering from buyer's remorse and is trying to drive down the purchase price.

Advo's financial performance has been center stage this week in a Delaware Court of Chancery courtroom, where Valassis is arguing it was duped into a transaction.

Advo says Valassis' executives pursued it this spring despite fair warning of problems that caused it to miss earnings targets.

Just weeks after the sales agreement was signed, Valassis sent forensic accountants to Advo to find out why the company's actual numbers for the quarter that closed June 30 fell far short of what Valassis was told to expect.

Valassis has accused Advo of fraud and failure to comply with terms of the sales agreement.

Advo says Valassis should be forced to make good on the sales commitment, even though the company's shareholders recoiled at word of the deal.

The trial is expected to run to Dec. 22.

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If you have an interest and would like additional details of this case you may want to review Valassis's pre-trial brief. It's 46 pages and updates can be found at http://phx.corporate-ir.net/phoenix....rol-news&nyo=0

Of course, there are always two side so consider checking out Advo's pre-trial brief at http://www.advo.com/

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Valassis, ADVO Agree to Merge Under Revised Terms

By Jennifer Saba

Published: December 19, 2006 11:10 AM ET

NEW YORK Valassis and ADVO have agreed to merge, amending the original terms of the deal. Valassis will acquire ADVO for $33 per share in cash or $1.2 billion including the $125 million in ADVO long-term debt.

The only condition applied to the close of the deal is ADVO shareholder approval.

The transaction is expected to close before Feb. 28. If the close is delayed, Valassis is required to pay ADVO shareholders interest on the $33 per share purchase price at a rate of approximately 11% per year with the rate increasing every month thereafter.

"Valassis determined that the evidence will not support the conclusion that ADVO or any of its directors, officers, agents or representatives engaged in any fraud or other misconduct in connection with the parties' entry into their original merger agreement," said a joint statement issued by Valassis and ADVO.

In the statement, Valassis Chairman, President, and CEO Alan Schultz said, "As we have maintained since the execution of the original agreement, we believe in the strategic value of an ADVO and Valassis combination and look forward to becoming a more diversified company with the benefits it will bring."

The agreement marks an end to a bitter battle that started shortly after the companies agreed to merge. On July 6, Valassis said it would buy ADVO for $1.3 billion or $37 per share in cash.

Valassis produces and distributes free-standing inserts in newspapers and ADVO is a direct mail company and sometime tough rival to the newspaper industry. The combined company would serve 20,000 global advertisers, including 94 of the top 100 in the U.S.

Both sides sold the acquisition as a marriage of love. "Since I took over as CEO eight years ago," said Schultz during a conference call after the deal was announced in July, "I have believed that a Valassis/ADVO combination was compelling."

Analysts viewed union with much more skepticism: "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 Paul Ginocchio, an analyst with Deutsche Bank, in a note released in July.

The situation started to sour when on Aug. 30 Valassis filed a lawsuit against ADVO in the Delaware Court of Chancery claiming fraud, misrepresentation and that ADVO cooked its books. ADVO countersued alleging that Valassis executives had cold feet.

ADVO shareholders approved the merger in a special meeting in September.

Since the lawsuits were filed, both sides issued a flurry of press releases making their case for (ADVO) or against (Valassis) the transaction.

The trial started on Dec. 11. On Monday, both sides agreed to talk and the trial was adjourned for one day pending on the outcome. Because both sides reached an agreement, the trial has been dismissed.