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December 29, 2006

McClatchy Sells Minneapolis Newspaper for Peanuts

McClatchy (MNI) announced it was selling the Minneapolis Star Tribune to a private equity outfit for $530 million. MNI will also receive a $160 million tax benefit on the sale. The Star Tribune is the 14th largest daily newspaper in the country by circulation.

MNI is selling the paper as the final major step in realigning itself following the acquisition of Knight-Ridder earlier this year. Proceeds from the sale will be used to reduce debt. MNI is comfortable with its new financial profile and believes it has flexibility to invest its remaining newspaper, particularly to develop digital initiatives.

Based on the assumption that the Star Tribune earns an operating margin slightly below the corporate average (a decent assumption likely based on the unionized workforce in Minneapolis), Goldman Sachs calculates the $530 million purchase price equates to 7.4 times 2006 estimated EBITDA. Merrill Lynch assumes higher margins and an even lower multiple of under 7 times EBITDA. MNI would no doubt include the tax benefit of $160 million in its calculation of the multiple. Using Goldman's assumptions, incorporating the tax benefit would raise the multiple to 9.6 times. For Merrill, the multiple rise to around 8.5 times....

The tax benefit is the result of the fact that MNI purchased the Star Tribune in 1998 for $1.2 billion. Even if MNI overpaid at the time, it is a telling commentary on the current outlook for the newspaper business that MNI is taking a 55% loss on its original investment.

Furthermore, the multiple excluding the tax benefit is the correct comparable for most other newspaper assets and newspaper stocks as there are not that many other assets that are held at inflated, late 1990s values for tax purposes.

Given that most newspaper stocks trade at 7-8 times current 2007 estimated EBITDA, it is probably fair to draw the conclusion that private market values are not at a significant premium to public equity values. Tribune (TRB) management and shareholders have learned this lesson in the past six months.

With valuation constrained by weak private market values and poor fundamentals, I would continue to avoid newspaper stocks. And I would use any strength related to deal announcements or speculation or signs that advertising and circulation comparisons are improving to sell current holdings or establish short positions. That would include industry bellwethers like Gannett (GCI) and New York Times (NYT) along with MNI.

Posted by Steve Birenberg at December 29, 2006 09:57 AM in Newspapers