By Jake Rossen
By Jesse Marx
By Michelle LeBow
By Alleen Brown
By Maggie LaMaack
By CP Staff
By Jesse Marx
I: PRUITT'S FOLLY: IS THERE A SMOKING GUN IN THE STRIB FIRE SALE?
When the McClatchy Company bought the Star Tribune from longtime local owners Cowles Media in March 1998, the transaction set a new high-water mark for newspaper sticker prices. The $1.2 billion McClatchy coughed up for the paper amounted to roughly 16 times the Strib's operating cash flow—its gross profits, essentially, before the additional costs of taxes and interest and sundry other accounting tricks were applied. Analysts routinely calculate newspaper values as a fluctuating multiple of the paper's cash flow, and no one had ever paid such a staggering premium for a single newspaper, let alone a "minor major" like the Strib. The price tag suited McClatchy CEO Gary Pruitt just fine, he assured the paper's ace business reporter, the late Terry Fiedler: "We're not in this to buy on the cheap and operate on the cheap."
No. He was only in it to sell on the cheap, as it turned out. The December 26 punting of the Star Tribune to Avista Capital Partners set a new industry benchmark of its own, as the new record low price for a prominent daily newspaper. The $530 million paid by the fledgling Avista equaled just 44 cents on every dollar McClatchy had ponied up less than nine years before. The price reportedly reflected a valuation of just 7.4 times cash flow (the Wall Street Journal later said 6.5)—in a year when, as analysts later pointed out, other daily papers had been selling for nine to 12 times cash flow.
Pruitt defended the deal in a same-day memo to McClatchy staff, citing "very specific conditions involving the Star Tribune and today's changing media landscape." Speaking in the Wall Street Journal, Pruitt further pronounced the Strib the chain's worst-performing paper in terms of profit margins and overall revenue growth, suffering a tumble of 6.1 percent in 2006 receipts while McClatchy as a whole was posting very slight gains for the year.
Another "very specific condition" of the sale concerned McClatchy's tax bill. Publisher Keith Moyer made it more explicit in an email to staff, alluding to "unique financial tax advantages" that only the unloading of the Star Tribune could afford McClatchy. By virtue of the paper's high 1998 sale price, the 32-paper Sacramento-based chain will be able to claim a whopping $450 million-plus loss on the Strib sale, in turning allowing Pruitt and company to write off $160 million of an estimated $500 million in capital gains taxes they owe after turning around and reselling 12 of the Knight-Ridder papers they acquired last summer. (The reported take from those 12 sales, which included the St. Paul Pioneer-Press: $2.1 billion.)
Analysts quoted in the first days after the announcement were floored by Pruitt's decision to dump his flagship paper for a few dimes on the dollar. But they also framed the matter more or less as Pruitt had: It was a financial decision, regrettable but motivated only by the workaday economic demands of Wall Street. As John Morton, one of the most visible industry watchers, told City Pages, "This was basically a financial deal. McClatchy, in my opinion, is acting rather coldly in its financial interests by discarding a good newspaper whose operating revenues aren't up to expectations. For the most part, publicly owned companies are more interested in profit and loss than in publishing good newspapers."
But Pruitt may be a lucky man if the worst they call him is cold-hearted. Even after you acknowledge the unique tax breaks contained in the deal, and grant in principle that publicly traded newspaper companies care more about quarterly profits than quality papers, there is still plenty that seems odd about the sale.
To see why, stop and consider the extent of the Star Tribune's market dominance, and its strategic importance to McClatchy, even in its present declining state: