McClatchy Selling ‘Star Tribune’ to Private Equity Group

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By: Mark Fitzgerald

The McClatchy Co. said late Tuesday that it had agreed to sell the Star Tribune of Minneapolis to a private equity firm, Avista Capital Partners, for $530 million in cash.

McClatchy said a tax loss carry back from the transaction is expected to yield a cash tax benefit of $160 million by 2008 — making the total cash proceeds of the sale $690 million.

Sacramento-based McClatchy said the money would further draw down the debt from its acquisition this summer of Knight Ridder.

“The Star Tribune is a great newspaper with talented staff and management,” said Gary Pruitt, McClatchy’s Chairman and CEO. “It is a profitable business that has generated significant returns for the company over the years. However, as we continued to analyze our business following the Knight Ridder acquisition, it became clear that selling the Star Tribune strengthens McClatchy’s competitive position. This decision will better align our portfolio for today’s changing media environment.”

McClatchy said it had no plans to divest any further newspapers.

On its Web site, the Star Tribune reported that Chris Harte, a member of Avista?s advisory board, will serve as chairman of the board that will oversee the newspaper. Harte is a former publisher with Knight Ridder who earlier this year was rumored to be putting together a team to purchase The Philadelphia Inquirer and The Philadelphia Daily News, which were ultimately sold to a group led by Brian Tierney.

Publisher Keith Moyer told a newsroom meeting that he would remain as publisher, and the paper?s management team would remain intact, according to the Star Tribune report by John Reinan.

When asked about the deal, analyst John Morton, president of Morton Research Inc. in Silver Spring, Md., told E&P, “The Star Tribune, like many other big-city newspapers, is struggling a bit.” But he was still “very surprised” by the move to sell the paper.

Morton said it now seems like “McClatchy is far more interested in its financial performance than in owning good newspapers. The Star Tribune has always been a good newspaper with a long and storied history.”

McClatchy purchased the Star Tribune from Cowles Media Company in March 1998 for a total of $1.2 billion, after taking into account McClatchy’s later sale of Cowles’ magazine and book publishing businesses. The Star Tribune is the largest newspaper in Minnesota, with daily a circulation of 361,172 and Sunday circulation of 596,333.

When McClatchy bought Knight Ridder, it immediately put a dozen dailies up for sale, including the Star Tribune’s rival across the Mississippi, the St. Paul Pioneer Press. At the time, it said that it was shedding the Pioneer Press because of antitrust concerns.

But McClatchy said that once the Knight Ridder transaction was complete, “a detailed analysis of McClatchy’s portfolio identified a number of unique financial benefits associated with the sale of the Star Tribune that would serve the long-term interests of the company and its shareholders.”

Chief among them was the tax advantage, McClatchy said. The sale will allow it to reduce debt, improve financial performance, and provide “increased flexibility to capitalize on new opportunities in the newspaper industry, including digital investments,” the company added.

“As we said during the divestiture of select Knight Ridder newspapers after our acquisition, McClatchy is a disciplined company driven by clear-eyed strategic decisions,” Pruitt said. “We don’t shy away from the tough decisions necessary to build the foundation for overall success. In this case, the analysis was clear: McClatchy will be a stronger company, better positioned to build its future by selling the Star Tribune.”

A partner in New York City-based Avista, OhSang Kwon, said the firm regards the Star Tribune as a “very attractive asset among metropolitan newspapers” because of its “exceptional brand,” its strong market and experienced management team.

“We will be entering this market in a leading position and find great promise in the company’s potential for growth,” Kwon added.

The tax loss carryback will be applied against the tax gains generated by the sales of the dozen former Knight Ridder papers, which became known as the “Deserted Dozen.”

“The fact that McClatchy is in a position to capture $160 million in addition to the sale proceeds because of favorable tax conditions made selling at this time compelling,” McClatchy CFO Pat Talamantes said in a statement.

After the sale closes, which is expected to be in the first quarter of 2007, McClatchy will be the third-largest daily newspaper chain 31 papers in 29 markets.

Credit Suisse Securities (USA) LLC served as financial advisor to McClatchy in the transaction. Wilson Sonsini Goodrich & Rosati served as legal counsel to McClatchy, and Davis Polk & Wardwell served as legal counsel to Avista.

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