Avista comments on Star Tribune

A report in the Wall Street Journal says few of the headline-grabbing buyouts have been as gutsy as the $530 million planned purchase by Avista Capital Partners of McClatchy Co.'s Minneapolis Star

The deal for the nation's 15th-largest newspaper by circulation comes amid a slump in the business. The Star Tribune has been the worst-performing paper in terms of revenue for McClatchy, which paid $1.2 billion for the paper in 1998. The Star Tribune's ad revenue dropped about 6% last year on a circulation decline of about 4%.

Avista mightn't be a household name, but its founders, Thompson Dean and Steven Webster, have been well known in the buyout community for more than a decade.

So what do they see with the Star Tribune deal that others in the buyout world missed? A very cheap price -- 6.5 times the paper's cash flow -- a respected brand and an industry that may be bottoming out and poised for a rebound.

"We got a premium paper in a healthy market, and we paid a very attractive price," says Dean. "There is meaningful franchise value for top-20 papers. The risk is that readership continues its steady decline."

"Newspapers are poised to stabilize their revenue base, and advertising rates are stabilizing," Dean says. "People will continue to read newspapers."

Dean wouldn't address whether Avista will slash costs or lay off employees. "Newspapers have to recognize that they are operating in a different environment, with different pressures, declining readership and advertising pressures," he says. "We have to get additional revenue growth and do things more efficiently, but that may not be about staff cuts."

While public investors penalize newspaper companies for their lack of growth, private-equity investors generally are more concerned with steady cash flows. And newspapers usually don't have steep capital expenditures that soak up cash.

So if the Star Tribune's circulation stops declining and Avista can generate some growth for the paper's Web site, the firm might avoid significant cost cutting.

"To generate an acceptable return, we only need modest growth because of [the paper's] impressive high free-cash flow," and the low purchase price that Avista paid, Mr. Dean says.

Although Avista hasn't made previous newspaper acquisitions, it placed Chris Harte, a former Knight Ridder executive whose family is among the owners of San Antonio-based direct-marketing firm and publisher Harte-Hanks Inc., as the chairman of Star Tribune's holding company.

Click on the headline to read the full Wall Street Journal story by Gregory Zuckerman.