Markets

The Day After: News America CEO Carlucci Finds Options Limited

By Jim Edwards

Updated on: July 24, 2009 / 5:40 PM EDT / MoneyWatch

News America Marketing CEO Paul "I will destroy you!" Carlucci woke up this morning with a headache: What to do about the $300 million verdict his company lost against rival newspaper coupon agency Valassis.

In just seven months, Valassis has gone from a weak competitor whose stock was "worth zero dollars" and was nearly de-listed by the NYSE to having News America in the palm of its hand. Currently, Carlucci has no good options.

As BNET noted yesterday, he can appeal the verdict and hope that an appellate panel can find some mistake in the trial judge's handling of the case. Daniel Low reports that NAM president Chris Mixson wants to do that. But that's a long shot, and even if the verdict were overturned Valassis would be enthusiastic for a redux given that the "dry run" already went their way.

Carlucci's second option is simply to pay Valassis and hope he wins the other two pending cases. BNET previously noted that Carlucci arranged a mysterious $1 billion debt facility that has yet to be deployed. But as those cases are on similar issues, he can no longer be confident that the damage will be limited to $300 million. In the federal court case, damages are tripled, which suggest that News America's potential liabilities could top $1.2 billion ($300 million plus $900 million).

The third option is to settle the award by acquiring Valassis, just as it did in a similar trial with smaller competitor Floorgraphics. That would give News America a complete monopoly over both in-store supermarket advertising and newspaper coupons. Such an arrangement would instantly attract the attention of the FTC, which has previously reached a consent order with Valassis that forbids the company from inviting competitors to collude on prices. So that option is unlikely.

There is one action that Carlucci can take to limit his liabilities, and that's to settle with Insignia Systems, possibly by acquiring it. With the wind blowing in plaintiffs' favor, taking the Insignia litigation -- which, you guessed it, is over similar issues -- off the table at least narrows the scope of News America's potential losses.

But even that presents a problem: Valassis and Insignia have a relationship which BNET understands is either contractual or gives Valassis a partial ownership stake in Insignia. Acquiring Insignia would leave Valassis and News America holding hands -- another seemingly impossible juxtaposition.

Thus Valassis has News America over a barrel. Carlucci must either litigate or pay millions. If he chooses the latter path, News America's money will be used against it in a price war -- a war in which News America dare not offer predatory bundled discounts.