Star Tribune price reflects tough ad market

When McClatchy bought the Star Tribune, newspapers were doing very well. Advertising revenue was soaring. And newspapers didn't yet see the Internet as a major threat. Now, ad revenue growth is slowing or even decreasing. Department store, telecommunications and employment advertising are especially soft. And Internet-based companies are taking away ad dollars that newspapers once got.

So, it's not surprising that a newspaper like the Star Tribune doesn't fetch anything close to the price it once commanded.

Unfortunately, the prospects of the business don't look nearly as good as they did eight years ago. That's reflected in the sales price.

"It's kind of a sign of the times," according to Rick Edmonds, a media business analyst at the the Poynter Institute, an independent training center for journalists. "Unfortunately, the prospects of the business don't look nearly as good as they did eight years ago. That's reflected in the sales price.

"Circulation is down, advertising revenues are down, earnings are down and it doesn't look like any of those things are going to reverse right away."

Slowing ad growth means lower earnings. Wall Street has punished publicly held newspaper companies by driving down their stock prices. And the prices that papers command on the market have tumbled, too.

"Perhaps some of the newspapers have fallen to half of their value," says newspaper industry analyst John Morton. But Morton notes newspapers are still generally pretty profitable, posting average margins of about 15 percent.

"That's a margin that most industries can never ever hope to achieve," he says. "But the problem with the newspaper business, particularly in the eyes of Wall Street, is that as recently as 2002, the average margin was 22 percent."

Newspapers typically sell for a multiple of their pre-tax earnings. That multiple often hit 12 to 13 times earnings when newspaper were doing really well. Now, Morton says prices are trending toward 10 times earnings - or less.

Like most newspapers, the Star Tribune has seen its circulation shrink. The Sunday edition, packed with advertising inserts and other ads, is the paper's big money-maker. But circulation for the Sunday paper has fallen from about 673,000 in 1997 to about 596,000 this year. To be sure, lower circulation depresses ad rates and revenue.

McClatchy does not provide detailed information about the Star Tribune's finances. But CEO Gary Pruitt told the Wall Street Journal this week that the Star Tribune was not performing as well as other McClatchy papers.

Pruitt said the Star Tribune had been the company's worst-performing paper in terms of revenue. Pruitt told the Journal that the Star Tribune's ad revenue so far this year had declined about six percent. But Pruitt said McClatchy's overall ad revenue was up for the year.

Former Pioneer Press associate publisher John Finnegan says the Twin Cities market apparently didn't turn out to be as profitable as McClatchy expected.

Finnegan suspects that had something to do with the media competition in the market. The Twin Cities, Finnegan notes, is one of the few major metro markets that still has two daily newspapers.

"They probably saw that the growth potential they had hoped would be there was not there," Finnegan says. "I think that means the competition is still pretty heavy in the metro area for circulation and advertising."

McClatchy says the Star Tribune's sale was due primarily to tax factors. By selling the paper at a loss McClatchy will see a tax benefit of about $160 million.

That benefit will be used to offset big tax hits McClatchy faces on the sale of a dozen papers it acquired earlier this year as part of the Knight Ridder chain, including the St. Paul Pioneer Press.

But McClatchy CEO Gary Pruitt has also said the sale would boost his company's performance and help it pay down debt incurred when it bought Knight Ridder's newspapers. McClatchy kept most the Knight Ridder daily papers, keeping 20 deemed to be in high-growth markets.

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