Star Tribune's owner forced to write off much of its investment

Avista Capital Partners wrote down 75 percent of its $100 million share of the purchase price and said the outlook is still uncertain.

The owner of the Star Tribune has informed investors that it has written down the value of its $100 million investment in the newspaper by 75 percent to reflect deteriorating conditions since the purchase in March 2007.

"In the past year, the newspaper industry has suffered greater than expected declines in circulation and advertising revenue, particularly in print classified advertising," the memo from New York's Avista Capital Partners said. "The outlook in the near to medium term remains uncertain."

The write-down, taken at the end of 2007, reflects the estimated loss of value and is consistent with the falling stock prices of publicly held newspaper companies such as McClatchy and the New York Times. Avista's public accountants required the private equity firm to write down or "mark to market" the estimated value of the Star Tribune.

The memo denied a recent report in the New York Post that the Star Tribune may file for bankruptcy.

"The Star Tribune currently has sufficient liquidity and is up to date on all its debt payment obligations," said the memo, distributed by Avista.

The bankruptcy speculation followed the revelation that the Star Tribune has hired Wall Street's Blackstone Group, the financial advisory and restructuring firm, to analyze its balance sheet and business options.

Avista paid $530 million to acquire the Star Tribune in early 2007 from McClatchy Newspapers. McClatchy paid $1.2 billion for the newspaper in 1998, before Internet publications and advertising competitors started to cut into newspapers' circulation and advertising revenue.

The value of Avista's Star Tribune-related debt also reflects a serious erosion in the value of the company over the past year.

To finance its acquisition of the Star Tribune, Avista borrowed $340 million that was valued recently at 56 cents on the dollar, according to bid prices for "institutional leveraged loans." A subordinate loan of $96 million trades for 10 cents on the dollar.

The Star Tribune had flat advertising revenue of about $309 million in 2004 and 2005, according to McClatchy. That doesn't include circulation revenue, which typically accounts for about 20 percent of total revenue. Avista, which doesn't reveal Star Tribune revenue or profits, has said the paper's revenue fell by about $75 million between early 2005 and early 2007.

Late last year, Chris Harte, an Avista advisory board member and veteran newspaper publisher, took over the Star Tribune. The recent letter from Avista said Harte has cut costs to help offset revenue declines. The newspaper also has reduced employment in recent years.

"These efforts have yielded significant savings that will undoubtedly benefit the business, particularly once a turnaround in the environment occurs, but cost savings alone will not fix the current financial underperformance," the letter said. "We are optimistic that the additional leadership we have put in place in revenue-generating positions at the Star Tribune will formulate an effective strategy to grow revenue. We view 2008 as the year to prove a recovery is possible and that the trends we have experienced since the time of this investment can be reversed."

Avista's overall portfolio -- which includes energy, healthcare and other media investments -- increased in value by about 22 percent in 2007

Neal St. Anthony • 612-673-7144

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