Valassis May Not Be Able to Pay Debt; Litigation May "Materially Harm" the Company

Valassis may not be able to meet its debt obligations and its litigation against News America Marketing Group may "materially harm" the company, according to a filing with the SEC. The worst-case scenario? "Bankruptcy or liquidation," the company says.

The disclosure, in a 10-K filed on a March 3, paints a grim picture of a the direct mail giant; it is unable to raise its profit levels due to fierce competition with News America, rising legal bills and a massive debtload. The disclosures were made in the "Risk Factors" section of Valassis' 10-K.

Such disclosures are often boilerplate descriptions of things that "could" happen to a business -- and are routinely ignored. In this case, however, Valassis' description of its problems is unusually detailed and negative. Some highlights:

On debt: Our substantial indebtedness could adversely affect our financial health and make it more difficult for us to service our debt or obtain additional financing, if necessary.
We incurred a substantial level of debt in connection with our acquisition of ADVO in 2007. This high degree of leverage could have a material adverse effect on our business and make it more difficult for us to satisfy our obligations under our outstanding indebtedness.
We may not be able to generate a sufficient amount of cash flow to meet our debt obligations.
... If we cannot make scheduled payments on our debt, we will be in default and, as a result, holders of our debt could declare all outstanding principal and interest on our debt to be due and payable and we could be forced into bankruptcy or liquidation.
On litigation against News America: The current litigation with News America Incorporated may be costly and divert management's attention, which may materially harm our business.
Regardless of the outcome ... such litigation may be time-consuming and expensive and may distract our management from running the day-to-day operations of our business. The litigation costs and diversion of management's attention and resources to address the claims in the litigation may materially adversely affect our business, financial condition and/or operating results.

The suits claim that News America has conspired to fix prices and contracts in the in-store promotion business. Normally, price fixing keeps prices (and thus profits) artifically high. But in the same disclosure, Valassis states that competition with News America is driving down revenues and profitability:

News America Marketing FSI continues to compete aggressively for [free-standing insert] business. As a consequence, prices have declined substantially over the last several years and are expected to continue to decline in 2009. This, coupled with flat industry units, has generally resulted in declining revenues and profitability for our FSI business. In addition, our primary competitor, News America, has substantially greater financial resources than we do.

Two state suits against News America are due for trial in May and August of this year. A federal case has yet to get a trial date.

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