Another Saga of "Synergy"

A great business story is starting to unravel. In 1969, George Valassis opened a small home sales business that sold printing around Detroit. He had enough growth to purchase a printing press in 1971. However, he didn't have enough work for the press. So what did he do? To the dismay of paperboys since, he invented the coupon-insert-in-newspaper business, or in industry terms FSI (free-standing insert). Valassis grew rapidly and dominated the FSI business, until recently.

Over the time, Valassis has continued to search for other ways to get advertising dollars. This has accelerated over the years and recently culminated in the purchase of Advo - another great business story. Started in Hartford, Connecticut in 1929 by Paul Siegel, Advo specialized in delivering fliers door-to-door from retailers. Moving by fits and starts, Advo continued its growth into mailers for the large insurance companies. The growth reached a milestone when the United States Census Bureau purchased its mailing list for American households.

Both companies, Valassis and Advo have struggled with newspaper competition, changing technology and the search for better, more measureable results for their advertisers. Valassis made an acquisition of Advo in 2006, commenting on the multiple "synergies" that would be generated. As I have commented before in this blog, synergies seem to fail either because of illegal monopolies or an overpayment for an acquisition. This case seems to be the latter. But here is some truly destructive potential because of a huge (to me) amount of debt loading up the entire purchase price of $1.1 billion with an annual free cash of only about $100 million.

The stock (VCI) could be a real bargain, but the debtload looks too heavy. Here is a telling graph depicting the core weakness of the business which is servicing that debt:



It looks like Mama ain't using coupons as much these days!