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 AJR  Columns

From AJR,   February/March 2007  issue

Money Talks   

McClatchy’s disappointing decision to unload the Star Tribune


By John Morton
John Morton (mortoninc@msn.com), a former newspaper reporter, is president of a consulting firm that analyzes newspapers and other media properties.     

It could be said of McClatchy after the unceremonious dumping of Minneapolis' Star Tribune that the bloom is off the rose. Of course, there was a foretaste of this with McClatchy's earlier decision to unload a dozen of the dailies the company acquired from the late Knight Ridder last year.

It also can be said that the tenure of Knight Ridder's chief executive, P. Anthony Ridder, is starting to look better and better. Ridder's efforts can be seen as an attempt to save a real newspaper company--that is, one dedicated to publishing newspapers, some highly profitable and some not.

In a word, the Minneapolis deal and the sale of the former Knight Ridder properties come down to money. McClatchy has demonstrated that its devotion to profit-and-loss statements that appeal to Wall Street trumps any presumed role as the publisher of quality newspapers.

Now, it is true that the Star Tribune has struggled of late, as have almost all big metropolitan dailies, because of consolidation of department-store chains and telecommunications companies (both important advertisers), declining circulation and the migration of classified ads to the Internet.

McClatchy's chief executive, Gary Pruitt, said the Star Tribune's financial performance had been a drag on the company's profitability. He noted that McClatchy's cash flow margin was 25.2 percent through the first nine months of 2006 and would have been higher without Minneapolis. I'll note that McClatchy's margin already was the third highest among the twelve major publicly reporting newspaper companies.

Adding to the allure of jettisoning an "underperforming" newspaper like the Star Tribune for $530 million--or $670 million less than McClatchy paid for it in 1998--is the $160 million tax benefit McClatchy will receive for having made such a bad investment. In the world of Wall Street, this no doubt counts as an achievement, no matter how dubiously arrived at.

Ah, for the good old days, when newspaper companies were devoted to publishing newspapers. I recall the decades that Hearst Newspapers kept alive money-losing dailies in two-paper cities like Los Angeles, Baltimore, Boston and Seattle. Finally, even Hearst had to acknowledge that the future of second newspapers would forever be bleak. It shut down its papers in Los Angeles and Baltimore, sold Boston to an investor and got the Seattle Post-Intelligencer into a joint operating agreement with the dominant Seattle Times. (Disclosure: I have a minor consulting arrangement with Hearst.)

But there are differences between the Hearst and McClatchy actions. The Hearst papers were weak seconds to greatly dominant competitors, and they were not just underperforming--they actually lost money. McClatchy's discards--with one exception, in Wilkes-Barre, Pennsylvania --are the only ownerships in their markets and make money, although apparently not enough to satisfy McClatchy.

The major difference, though, is that Hearst is not publicly owned.

As I've written before, public ownership of newspaper companies is inimical to good journalism for a variety of reasons, chiefly pressure from Wall Street for ever higher profit. Even companies like McClatchy with two classes of stock, which allow families or management to control them, have come to bow to Wall Street pressures.

We have seen what can happen to a publicly owned newspaper company with just one class of stock, like Knight Ridder, when institutional shareholders become unhappy with financial performance (see "Sherman's March," February/March 2006). Now Tribune Co., also with one class of stock, is in turmoil over its future (see "Tribune Tribulations," December/January).

As for the Star Tribune, its future is uncertain under new ownership, although one can make some educated guesses. Its buyer is the private equity firm Avista Capital Partners. Such investors are not known for any particular love of journalism. Their goal is financial, and generally this means the new owners will want to sell the Star Tribune in five or six years for a much higher price than they paid.

One hopeful development is that Avista hired as chairman of the holding company that will oversee the Star Tribune Chris Harte, a veteran newspaper executive and member of a Texas family that once owned numerous newspapers in the state and elsewhere.

But the Star Tribune is facing a future in which everything it buys, from paper clips to newsprint, will be more costly without McClatchy's vast purchasing power. This will add to the cost pressures that Avista doubtless will bring to bear in an effort to increase the newspaper's profitability and value preparatory to a sale.

One can hope that Harte will be a brake on any particularly draconian cuts in the newsroom and elsewhere at the Star Tribune, but there is no assurance that the newspaper's abrupt return to private ownership will be an unalloyed pleasure for the Star Tribune's employees and readers.