Monday, January 01, 2007

What's it worth now? 

I get my own signal to evaluate the StarTribune's sale. (I don't think I've ever been Photoshopped before. It's quite an honor.)

I've tried to read up on what's happened with the sale of the StarTribune. First off, it's not really a $530 million deal as some are reporting. When McClatchy bought Knight-Ridder several months ago, it took on over $3 billion in debt. To help reduce the debt load and to appease anti-trust concerns, McClatchy sold off twelve papers (including the PioneerPress.) Those sales generated a taxable gain for the company, which according to at least one press release from the company was about $700 million. So the sale of the StarTribune at a loss creates an offsetting tax deduction that saves the company $160 million. That's not insubstantial; as far as McClatchy is concerned, it got $690 million for this deal.

I cannot get a grip on what the valuation of the StarTribune was here. When McClatchy sold off the KR papers it didn't want or couldn't keep it fetched 11 times cash flow. I don't have an EBITDA number for the StarTribune so I cannot judge what $690 million divides to so as to get a valuation. (Ad revenues are in the area of $300 million annually as best I can tell; I'll guess the circulation revenues are another $50-60 million. According to the 2005 annual report, it had $378 million of total revenues in 2005, down $2 million from 2004. But I have no idea what their operating costs are.) I do see from the company's reports that its Midwest properties were the worst-performing in advertising revenues.

The goal of McClatchy in purchasing KR was to get into more local markets to increase its online content. Bambi Francisco covers new media for the MarketWatch:
Take a look at some of the local sites that McClatchy is starting to roll out and essentially you'll see that they're a Craigslist meets CitySearch-like service, behind a Google-like fa�ade.

...Hendricks says that the nine search sites he plans to have up and running across the country by this summer will all have a different appearance depending on the community feedback. He intends to ask the readers and users to help shape the sites. (If you're interested in what the other eight sites might look like, check out and

Ultimately, however, he said that it's his bet and inclination that "the look and feel will likely end up that [Google's] way over time."

But so what, right? A nice interface may attract the user, but the quality of searches will keep them. And, unfortunately, since there isn't a local site for San Francisco, I haven't been able to test the search technology to see if it's any different from the information I get today.
For that to work, McClatchy has wanted to find fast-growth markets, operate the leading local internet business, and selling direct marketing and direct mail.

That is, contrary to what Nick Coleman might think, McClatchy is no longer a traditional newspaper company. I listened to CEO Gary Pruitt's last presentation on the web this morning and I cannot hear a single time where, in describing the synergy between web and print, did he mention the 'flagship' StarTribune. Not only did McClatchy need the cash then, but the StarTribune did not fit the new business model the company had. (As a matter of fact, Mr. Coleman, I suggest playing that recording of Pruitt before writing about this again. The writing was on the wall. Does it dawn on you now why only the STrib didn't use CareerBuilder?) McClatchy saw itself in a declining, cyclical market for print media and decided to change. Whether its moves will pay off is beyond my ability, but it sounds clear from that recording that print isn't going to be as important in generating revenue for McClatchy as it did in the past. (See, for example, McClatchy Interactive.)

Now to Learned Foot's more specific question: Will Avista engage in a slash-and-burn to the StarTribune pressroom? Understand first that Avista paid only the $530 million, and that many of the services it needs to run the paper, such as McClatchy Interactive, it can contract out to do. What we don't know about Avista is whether it still wants to continue to operate legacy media. They are a very new group spun off of a management team at Credit Suisse, so we have almost no history to go on. Avista owns Thompson Publishing, a web-based service to help firms get information on regulatory conditions in their industries. They also have a cable business in the Midwest. It has on its board a James "Jimmy" Finkelstein with media experience, so that's my guess for who will be Nick Coleman's new boss/slavemaster. If I've got the right guy, he actually does have a broadsheet. (UPDATE: Captain Ed links to a story that says the overseer will be advisor Chris Harte, who has run papers. I don't see where Ed gets the number that the STrib was generating $125 million in (assumably net) revenue, though. If they paid the same multiple that McClatchy fetched on selling the KR papers it couldn't keep, that would have put free cash flow at about $48 million per year.)

But I don't know that's as important as this. Given you paid "only" $530 million for a property the size of the StarTribune, it does not require a very big growth rate in StarTribune income to make this a profitable company for Avista. But it will require some growth in net revenue. And lately that's been absent at the STrib, as McClatchy found. It's unlikely that what is there can be split up and sold off, since McClatchy already took the parts it wanted -- the online part.