Minn. sale may signal devaluation of papers

$530 million is less than half what paper cost 8 years ago

Star Tribune seen as sign newspapers' value is sliding

December 29, 2006|By McClatchy-Tribune

MINNEAPOLIS -- Big-city newspapers, once held in high regard on Wall Street for their dependable earnings and advertising influence, have never looked so cheap.

On Tuesday, The McClatchy Co. agreed to unload the Minneapolis Star Tribune for $530 million - less than half the $1.2 billion it paid for the newspaper eight years ago - to a private investment group.

A tax break of $160 million resulting from the sale makes the deal worth $690 million to McClatchy. But as a multiple of cash flow - a common financial benchmark - the bid was substantially less than the amounts paid for other newspapers this year, according to investment analysts.

The low price fetched for the Star Tribune will set a new benchmark for newspaper valuations across the industry, media analysts said, and is bad news for other media companies - such as Tribune Co., owner of The Sun - that are weighing whether to sell their papers.

On the other hand, it could be good news for potential newspaper buyers. A Baltimore investment group headed by former Baltimore County Executive Theodore G. Venetoulis has expressed interest in buying The Sun, and billionaires Ronald Burkle, Eli Broad and David Geffen have all inquired about the Los Angeles Times.

"This deal confirms what many of us already know - that newspapers have lost esteem with investors," said Thomas Russo, a partner and portfolio manager with Gardner, Russo & Gardner, a Lancaster, Pa., money management firm that owns more than 2 million shares of McClatchy stock."That's good news for buyers, who can finance [newspaper] acquisitions at substantially lower cash-flow multiples."

Cash flow

In a report titled "Minneapolis valuation a bearish signal for the newspaper industry," Goldman Sachs said Avista Capital Partners is paying 7.4 times Star Tribune's cash flow - below the current newspaper industry's average valuation of 8.7 times cash flow. Including the tax benefit, the multiple rises to 9.6.

Cash flow is the amount of cash generated from operating revenues and investments, for example, minus the amount of cash consumed by operating and other expenses. Most newspaper deals over the past year have been priced at 10 to 12 times cash flow, said James Peters, advertising and publishing analyst at Standard & Poor's in New York. In 1998, McClatchy Co. paid 16 times cash flow when it purchased Cowles Media Co., the former parent company of the Star Tribune.

Not long ago, large metro dailies such as the Star Tribune were considered dominant brands in their markets, and they would have drawn a large amount of interest from potential bidders. But the Internet is stealing away advertising revenue and readers at a faster pace than many had anticipated, and there doesn't appear to be a bottom in sight, analysts said.

The decline has been more pronounced in large urban areas, where Internet use is higher and many people are more likely to go online to get their news and post classified ads. "The bigger papers are eroding much faster than the small- to mid-sized ones," said Tom Bolitho, president of National Media Associates, a newspaper brokerage firm in Ada, Okla.

James Walden, a media analyst with Morningstar, said it is possible that McClatchy accepted a lower sales price to get a transaction done quickly, before deals were struck for Tribune Co. or for The Boston Globe, which is widely believed to be for sale. Had McClatchy waited, it would have had fewer interested buyers, he said.

McClatchy treasurer Elaine Lintecum declined to say how many firms bid for the Star Tribune, and whether any of them were newspaper companies. She did say that the bids primarily came from "financial companies."

"I wonder if [McClatchy chief executiveGary] Pruitt was trying to strike while the iron was hot," Walden said. "He knew that if the Tribune got taken out, then it would have meant less interest in the Star Tribune."

`Out of spotlight'

That the winning bidder proved to be a private equity firm might not be a bad thing for the Star Tribune, noted Peters, the analyst at Standard & Poor's. A private equity firm may be more willing to invest in building new audiences through a beefed-up online presence than would a public company preoccupied with meeting Wall Street's quarterly earnings expectations, he said.

"At least now, the Star Tribune will be out of the spotlight for a while," he said, "so they might be able to make the transition to a new media environment without the public scrutiny."

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