By Jesse Marx
By Chris Parker
By Jake Rossen
By Jesse Marx
By Michelle LeBow
By Alleen Brown
By Maggie LaMaack
By CP Staff
Gary Pruitt said that the Star Tribune was dragging down McClatchy's bottom line, and strictly as a matter of earnings ratios, it was: The Strib's 18 percent operating profit last year lagged substantially behind the corporate average of 25 percent-plus. But ask yourself whether it's plausible that Wall Streeters have gone mad enough to prefer a gain in company-wide rate of return of less than 1 percent over the $50 million the Star Tribune added to McClatchy's bottom line in 2006. The answer would appear to be no. Wall Street, so far, is emphatically underwhelmed by the new, Strib-free McClatchy. After advancing almost 2 percent on the day the sale was announced, to $43.07 a share, McClatchy stock began slipping again, shedding almost 5 percent to $40.97 by the end of last week.
So again: How exactly does selling off this paper at this moment, for considerably less than prevailing industry standards would have dictated, constitute prudent fiscal management?Mike Meyers thinks he knows the answer: It makes no sense at all. The paper's 57-year-old economics reporter is a figure legendary around the newsroom for his gruffness, acuity, and anti-sentimentality. ("Don't ask me how I feel about the sale," he growled by way of a howdy-do when I phoned him. "I don't deal in feelings. What matters is the set of facts surrounding the sale, which are very clear.") He has no compunction about sharing his theory of events ("no, on the record. I hate people who go off the record"), which is simple and to the point: McClatchy management fucked up and put itself in a position where it had to sell something to pay its tax bill.
"It's very straightforward," Meyers said. McClatchy execs "bought something they couldn't afford" when they purchased the Knight-Ridder chain for $4.1 billion plus another $2 billion in assumed debt in March 2006. "And they had to sell the family silver to make their first mortgage payment. They had to sell 12 papers up front to help pay for it, and it seems obvious that it was only later on they realized that the capital gains from those sales were going to mean a big tax bill. The Knight-Ridder [sell-off] deals were sealed in June. The Star Tribune was sold very abruptly at the end of December. That suggests the tax implications weren't fully addressed when they made those [sales]."
There are at least two other bits of circumstantial evidence that the sale of the Strib was a rush job, in Meyers's view. First, "If they're paying the top capital gains rate of 35 percent in this deal, as I assume, that means they sold us for about $457 million less than we were worth. The fact they didn't take more time and set up an auction for the paper suggests a hurried sale in which the ticking clock was a factor."
And this: "Back in the fall, from September 15-18, we had the McClatchy board of directors traipsing through town getting the cook's tour of the largest paper in the chain, the crown jewel. They were here to meet people and kick the tires. Why would you do that if you know you're on the verge of selling it? It seems to me that something important happened after that visit." That something, Meyers believes, was the belated realization that McClatchy faced a much bigger tax bill than it had cash on hand to pay.
Business analyst John Morton dismisses that scenario out of hand: "I'm sure they considered [the tax implications of the KR sell-offs] very carefully." But one California media consultant with friends inside McClatchy HQ said of Meyers's theory, "I think that sounds absolutely right. The Star Tribune was McClatchy's pride and joy. They routinely touted it on all the Wall Street analyst calls. And inside the company they were foreseeing a better competitive climate for the paper due to the Pi-Press's new management, which they didn't think was as formidable a competitor as Knight-Ridder had been. So there was even optimism about improving the [profit] margins. It's hard to believe they'd choose to sell it except under duress."