Sale could reset the bar for newspaper deals -- lower

  • Article by: CHRIS SERRES , Star Tribune
  • Updated: December 27, 2006 - 10:19 PM

Based on a multiple of cash flow, the price paid for the Star Tribune was much less than those paid for other papers this year, analysts say.

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

On Tuesday, the McClatchy Co. agreed to sell the Star Tribune for $530 million -- less than half the $1.2 billion it paid for the newspaper eight years ago. 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 less than the prices paid for other newspapers this year, according to investment analysts.

In a report Wednesday, titled "Minneapolis valuation a bearish signal for the newspaper industry," Goldman Sachs said Avista Capital Partners is paying 7.4 times the 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 revenue and investments, for example, minus the amount consumed by operating and other expenses.

Most newspaper deals in 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.

McClatchy shares closed down 1 cent Wednesday, at $43.06. The stock rose 1.9 percent Tuesday, although the deal was announced after the market closed.

The price fetched for the Star Tribune will set a new benchmark for newspaper valuations across the industry, and it could force other newspaper companies to sell at prices considered unthinkable just a few years ago, media analysts said Wednesday.

"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.-based 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."

Bigger, but not better

Not long ago, large metro dailies such as the Star Tribune would have drawn a large amount of interest from potential bidders. But competition from the Internet has grown quicker than anticipated, and it's uncertain where that will lead, 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 to post classified ads. "The bigger papers are eroding much faster than the small to midsized ones," said Tom Bolitho, president of National Media Associates, a newspaper brokerage firm in Ada, Okla.

The low valuation is also bad news for other media companies weighing whether to sell their papers. Tribune Co., which owns 11 daily newspapers, including the Los Angeles Times and the Chicago Tribune, is exploring a possible sale. And there is speculation that the New York Times Co. is trying to sell the Boston Globe, which has struggled with slumping ad sales.

"Anytime a big paper like the Star Tribune sells, everyone in the industry takes notice," Bolitho said. "This definitely sets a new benchmark" for newspaper valuations.

James Walden, a media analyst with Morningstar, said it's possible that McClatchy accepted a lower sales price in order to get a transaction done quickly, before the Tribune Co. or the New York Times Co. struck deals of their own. 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, or if any of them were newspaper companies.

However, she did say that the bids primarily came from "financial companies," such as Avista.

"I wonder if [McClatchy CEO Gary] 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."

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