Mike Sweeney, the part-time chairman of the board at Star Tribune Media Holdings, had a hectic summer.
In addition to his work at the Star Tribune, his day job as CEO of Steinway Musical Instruments put him in the middle of the spirited bidding process for Steinway that was finally won by Paulson & Co.
Sweeney said the outcome couldn’t have been better for Steinway’s future. Paulson & Co.’s founder is a celebrity investor and a music enthusiast who quickly assured Steinway owners and dealers that he wanted to preserve the company’s ways, not change them.
“As a steward of the business,” Sweeney said, “it was my hope that the high bid would come from someone who would nurture the company over the long term.”
As Sweeney spoke about the Steinway deal in a recent interview, the subtext couldn’t have been clearer.
Steinway is an unusual company whose reputation for producing a quality product attracted a great new owner. The same thing could happen when the time comes to sell the Star Tribune, Sweeney suggests, and for some of the same reasons.
And that time will come, possibly as soon as next year, as the Star Tribune’s private-capital owners move to get their money back out of their investment, as all private equity investors do.
Sweeney paraphrased the Grateful Dead when he called the Steinway sales process “a long, strange trip,” and that it was. It was underway when he became interim CEO in fall 2011, as his predecessor had to step aside when he was discovered to be involved in a potential bid.
Paulson & Co. was a late arrival to this party. The process by then had produced a tentative deal. Steinway said in July that the private equity firm Kohlberg & Co. would buy the company for $35 per share. Steinway did, however, keep for itself the right to conduct a 45 day “go-shop” effort to find a higher bid.
It was during this period that Paulson surfaced as a buyer. An auction of sorts took off, and Paulson really wanted to win.
Paulson & Co. is a global hedge fund manager controlled by founder John Paulson. He’s best known for generating big returns on the smart side of trades in the subprime mortgage derivatives market during the financial crisis.
Steinway enthusiasts are probably far more impressed by the fact that he owns three Steinway pianos — models M, O and B — and says he’s planning on buying a fourth. Within a day of the announcement, he sent a letter that said he was not going to change a thing in how Steinway builds pianos.
“No one I know in the business thinks it’s a bad thing,” said Larry Fine, the editor and publisher of Piano Buyer magazine.
In the end, of course, it was all about Paulson’s money, not his passion for music. Paulson & Co. bid $40 per share for Steinway, for a total price of $512 million, and provided plenty of evidence it could close the deal. The runner-up dropped out at $39 per share.
Sweeney, like the other directors, had what’s called a Revlon obligation, a term in public company corporate governance that means that when a company is being sold, the board’s responsibility narrows down to just picking the bid with highest cash value.
Sweeney agreed he couldn’t ignore value and vote for the most benevolent prospective owner, but he said that every effort was made to make sure the high bidder understood that maintaining the traditions that underlie Steinway’s quality was the smart play.
To tinker with that, Sweeney said, might mean losing a chance to someday sell a premium piano to some of the 35 million students now studying piano in China. That’s not a bad growth opportunity, he said, for a 160-year-old company.
It’s that kind of thinking that’s going to guide the process when it’s time to sell the Star Tribune.
Sweeney calls himself the “chief stability officer” of the Star Tribune, having become chairman in 2009 after the painful reorganization of the company and its emergence from bankruptcy.
It would be pretty easy to overstate the similarities between a manufacturer of a premium piano like Steinway and the Star Tribune. A Steinway piano can be a family heirloom passed between generations, while a printed newspaper can wrap the walleye catch by lunchtime.
What’s similar to Sweeney is the notion of community and making sure the products are made as well as they can be.
Steinway’s community is all the musicians, dealers, educators and enthusiasts who care passionately about their Steinway pianos. To remain viable, a media company like the Star Tribune needs to generate that same kind of passion in its community. If it does, it can have a sustainable value like, well, a hand-built Steinway.
Sweeney says the Star Tribune must continue to innovate. It still needs to become more efficient. That’s true for Steinway, too. But a cost-takeout strategy that, as Sweeney put it, “cuts into muscle” will quickly erode the value at the Star Tribune.
Sweeney said the company’s majority investor, Wayzata Investment Partners, has been supportive of the Star Tribune’s management and board. Evidence of quality includes two Pulitzer Prizes.
On the other hand, Wayzata’s partners are in much the same boat as directors of Steinway with their Revlon obligation. They can’t pick a buyer who wants to buy cheap but promises to produce the kind of journalism that wins more Pulitzers. They have to maximize the proceeds from the sale of an investment for their limited partners.
It’s been about five years since Wayzata invested in the Star Tribune, and that’s about the length of a typical holding period. Sweeney said a sale could come as soon as 2014.
“I think they feel like their investment is growing in value,” he said of Wayzata.
There are certainly questions about how any sale process will go. Among the many differences between Steinway’s deal and what may happen here is that Steinway’s investment banker managed to contact 65 potential buyers in just 45 days this summer. The list of candidates eager to hear about a newspaper deal won’t be nearly as long.
So another question that comes to mind is this: Like his Steinways, does John Paulson own three newspapers?
Sweeney smiled and said, “I don’t think he owns any.”