March 19, 1998: McClatchy completes acquisition of Cowles

The “Cowles” sign has already been taken down and lugged away from the Minneapolis headquarters. Today, stockholders will complete the last of the formalities by voting to have California-based McClatchy Newspapers Inc. take control of Cowles Media Co., the parent of Minnesota’s largest media organization, the Star Tribune. The approval of Cowles and McClatchy stockholders will mark the end of three generations of Cowles family ownership of the newspaper and complete a $1.4 billion sale agreement signed Nov. 13.

Also scheduled to close today are the sales of Cowles’ non-newspaper properties, which publish lifestyle, hobby and trade magazines, as well as newsletters and books. McClatchy will use the after-tax proceeds of the sales, $170 million, to pay down debt.

McClatchy CEO Gary Pruitt, who engineered the deals, said the Sacramento-based newspaper company promotes local autonomy in its markets such as Tacoma, Wash., and Raleigh, N.C., and would do the same in Minneapolis. “Readers should be reassured that no one in California is going to be making decisions about what is being printed on Star Tribune presses,” Pruitt said. “Those decisions will be made locally by people who know the market best.”

Star Tribune Publisher Joel Kramer will continue in his role and report to Pruitt. Kramer would forgo about $670,000 in severance pay if he stayed with the paper more than six months after McClatchy took control. In any case, Kramer will receive nearly $8 million, from stock and options, at the deal’s close. Pruitt said we “want the executive team at the Star Tribune to stay, and that includes Joel Kramer.” Kramer has said he has not yet made a “long-term decision.” Overall, McClatchy plans no layoffs or hiring freezes at the Star Tribune, at least in the near term. “We’re not in this to buy on the cheap and operate on the cheap,” Pruitt said. The Star Tribune has a payroll of 2,700 full-time-equivalent employees.

However, Pruitt noted several changes he anticipated at the Star Tribune in the near term: - News: Space and news staffing will remain stable, he said. The Star Tribune has 370 newsroom positions.

- Circulation: “The plan is to hold the subscription price and increase circulation volumes,” Pruitt said. “Circulation has gone down over the past couple of years. We would like to see it grow.”

(Home delivery prices of $17.90 a month in 1997 are “at the high-end” of what daily newspapers elsewhere are charging, according to newspaper analyst Doug Arthur of Morgan Stanley Dean Witter.)

- Advertising: There will be more zoning of advertising, as technology allows, and the newspaper may consider more zoning of editorial content.

Pruitt also said several factors have given him a greater “comfort” about the deal, including low interest rates, moderate newsprint prices and the proceeds brought by the sale of Cowles’ non-newspaper properties.

He’s particularly enthusiastic about the Twin Cities market, which has an average household income 15 to 20 percent above the national average, and the highest average of any of McClatchy’s larger markets. “I feel better about the deal than ever before,” Pruitt said.

McClatchy has a history of “paying aggressive prices for acquisitions and making them pay off through good execution,” Arthur said.

Based on the most recent example, the company’s $374 million purchase of the Raleigh, N.C., News & Observer in 1995, Arthur said he expected McClatchy to “tread lightly” with the Star Tribune, “especially in the beginning.” The News & Observer acquisition, which Arthur deemed successful, was primarily a “revenue story” rather than a matter of cutting costs to make it work, he added.

Matti Prima, director of KPMG Consulting’s information, communication and entertainment practice, said McClatchy will need more time before it formulates many concrete plans. “You don’t really know what you’ve acquired until you have it,” Prima noted, so “you normally wouldn’t do anything for six to nine months.”

Even then, McClatchy is under no great pressure to undertake aggressive cost cutting, Prima said, despite paying “a fancy price” for the Star Tribune and having as much as $1.15 billion in debt as a result.

Analysts estimate that McClatchy’s 1998 cash flow earnings before interest, taxes, depreciation and amortization as four times the company’s projected $70 million in annual interest payment for the Star Tribune. (Cash flow at the Star Tribune alone in the current year has been projected at $90 million.) “McClatchy is a very strong company ... four times debt service, that’s unbelievably good,” Prima said. According to Cowles Media’s latest proxy statement, the Star Tribune had operating earnings of $71.2 million in fiscal 1997 on revenue of $350.1 million. Its non-newspaper operations lost $5.8 million and had revenue of $167 million. McClatchy had operating income of $116 million on 1997 revenue of $641.9 million.

Texas-based newspaper analyst Ken Noble said he finds the matchup of McClatchy and Miami-based Knight-Ridder Inc., which owns the St. Paul Pioneer Press, intriguing. The Star Tribune’s annual revenue is about three times that of the Pioneer Press, but Knight-Ridder is much larger than McClatchy.

“McClatchy has won in Sacramento, Anchorage and taken territory with its Tacoma paper competing against the Seattle Times, which is half owned by Knight-Ridder,” Noble said. Knight-Ridder, meanwhile, is a “tough, successful competitor” that has “become more aggressive in recent years.”

Some of McClatchy’s competitors may have gone out of business, “but they’re not going to do that to Knight-Ridder” in the Twin Cities, Arthur said. Said Pruitt: “I don’t think McClatchy is going into this with the goal of knocking the Pioneer Press out of business. At the same time, we’re not afraid of competition. We’re not going to shy from the fact that the Star Tribune is now and forever the newspaper of the Twin Cities.”