By: And They Moved On.”
It was Minneapolis that put the McClatchy Co. and CEO Gary Pruitt on the map when the then-small company outmaneuvered much bigger fish to purchase the Star Tribune for $1.2 billion in 1998 from Cowles Media Co. So when McClatchy unexpectedly sold the Star Tribune to Avista Capital Partners ? a deal announced the day after Christmas, no less ? Pruitt expected a winter-cold reception from stunned staffers as well as some outside observers in the Twin Cities. He had been through this before, 10 months earlier, when McClatchy announced it would sell off 12 Knight Ridder papers. At that time, he was deluged with hundreds of angry e-mails from crushed KR employees.
Since the Minneapolis sale, some Star Tribune newsroom staffers have been airing their grievances in the press, including a Minneapolis/St. Paul City Pages story by Britt Robson who quoted an unnamed staffer saying, “Pruitt is a joke.”
When asked how he felt about the spitballs hurled his way, Pruitt tells E&P: “I would feel worse if they were happy that we were selling them. I understand the criticism comes with the territory. … The Star Tribune contributed greatly to McClatchy. It was a difficult decision.”
Indeed, amid trying times for newspapers, there’s no place for sentimentality. In mid-January, Prudential Equity Research analyst Steven Barlow downgraded the company from neutral to underweight. He wrote, “Management is strong, but we think they are holding tough cards right now.”
Pruitt says McClatchy came to the conclusion to sell Minneapolis, which he claims “had underperformed for several years,” last summer when McClatchy executives applied the same set of criteria to its legacy papers as it did for KR. “At the same time the Knight Ridder deal was closing” ? at the end of June 2006 ? “we began evaluating the situation and concluded that the company would be better off long-term if we sold the Star Tribune.
“Classified and Internet competition is greater in the larger cities, and the metro papers feel it more keenly than the smaller papers,” Pruitt adds. Plus, it was “the only paper we could sell at a tax advantage.”
With other newspaper companies ? Dow Jones, Journal Register, Copley Newspapers, possibly Tribune ? tagging their papers for what’s shaping up to be a huge garage sale, McClatchy needed a deal, fast. “We wanted to to move very quickly,” Pruitt says about the manner in which the paper’s sale was conducted. “We felt that keeping the process quiet was the best way to do that.”
McClatchy surprised many when the details came to light, including the price ? which Merrill Lynch analyst Lauren Rich Fine called a “fire sale.” She pegged the $530 million transaction at a multiple of 6.5 times cash flow (before the nice tax benefit). Pruitt defended the deal, saying the $160 million tax benefit brought it up to $690 million, a multiple that is “higher than what we paid for Knight Ridder, higher than what we are currently trading at, and higher than the after-tax proceeds of selling the Knight Ridder papers.”
Ed Atorino, managing director of Benchmark Co. in New York, says when the tax benefit is taken into account, the deal came out “OK,” given the current environment for transactions. (He estimates a multiple of 8 times cash flow.) The fact that McClatchy sold the Star Tribune didn’t catch Atorino off guard. He says he expected McClatchy to do it earlier: “I was surprised [Pruitt] hung onto Minneapolis. It seems to me it didn’t fit the original strategy for the papers.”
Pruitt may not be winning accolades in Minneapolis for his approach to divesting, but the strategy may prove wise in a turbulent industry. Mike Simonton, senior director for media and entertainment at Fitch Ratings, says that finding partners willing to get a deal done rather than just kicking the tires “minimizes management distraction.” In the current climate, “management should be focused on fixing some very broad and serious industry problems instead of showcasing and trying to sell papers as a full-time job,” he adds, citing Tribune’s current woes as an example. “McClatchy found a party willing to make a legitimate bid