Star-Tribune may face bankruptcy

By Thomas Lifson

The death throes of the daily newspaper industry continue in an entirely predictable manner, as the largest newspaper in Minnesota, the Star-Tribune, is reportedly unable to pay its debts and may face bankruptcy. According to the New York Post:

One of the nation's top dailies, "The Strib," as it is known to readers in the Twin Cities, recently hired the Wall Street powerhouse Blackstone Group to restructure its balance sheet after failing to meet its debt obligations, according to people familiar with the company.

The broadsheet is unlikely to shutter its doors, but its creditors, including the banking giant Credit Suisse Group, figure to eventually end up controlling the paper. Down the road, the creditor group could then sell it after dramatically cutting costs.

The private-equity firm Avista Capital Partners, run by former Credit Suisse deal maker Tom Dean, purchased the Star Tribune from the McClatchy Co. in 2006 for $530 million. The New York firm, which put up $100 million of its own money and borrowed the rest, stands to lose its entire investment, sources said.

After Avista bought the company, the firm's partner, OhSang Kwon, was quoted in the paper as saying that Minneapolis-St. Paul was a "good market" and that "this is a good time to be buying newspapers."

Avista is the second buyer in a row to lose its shirt thinking it could swim against the vortex. Superficially, the Twin Cities, a growing, well-educated, affluent metropolis, sounded attractive to McClatchy, which bought the paper from the Cowles publishing empire that had owned it most of the 20^th century. McClatchy took a bath, selling the paper for $670 million less than it paid for it. They paid too much for a paper with competition (The Pioneer Press of St. Paul) in a metropolis where a high percentage of people are computer proficient.

I grew up with the Minneapolis Tribune and the Minneapolis Star delivered to my family's doorstep, and avidly read the papers until I left for college. I think they were better papers then.

The cost-cutting regimen to come at the Strib, will see a lot of people lose their jobs. If the downsizers have their wits about them, they will fire a lot of the politicized left wing editors and writers, who only drive away customers. But that would require an unlikely level of discernment by the ax-wielding financiers.

There will be a new Strib no doubt, a much more modest affair. I watched the Oakland Tribune downsize after its editor led a buyout group and could not make a go of it. The new paper is lean but competent. It shares a lot of staff with other dailies in the Bay Area owned by the same media company. I don't know if the Strib will have a similar oppourtunity.

This story will be repeated elsewhere, as other recent purchasers of papers, like Sam Zell of the Tribune Company, also are finding themselves unable to escape the newspaper death spiral. The industry is being restructured before our eyes. No doubt both the Wall Street Journal and the New York Times will seek to entice Strib readers when the news hole shrinks and the paper becomes a shadow of its former self. For the present, the market for national quality dailies seems robust, as they pick up disappointed readers of metropolitan dailies.

Hat tip: Rosslyn Smith