By AP Business Writer
updated 12/27/2006 9:53:57 AM ET 2006-12-27T14:53:57

McClatchy Co. said Tuesday it will sell the Star Tribune newspaper to the private equity firm Avista Capital Partners for $530 million, a sharp drop from the $1.2 billion it paid to acquire the flagship property just eight years ago.

McClatchy sold its largest newspaper in part because it can take a tax loss, and because the newspaper's growth had tapered off, said Chairman and CEO Gary Pruitt.

McClatchy spent $4.5 billion earlier this year to buy the Knight Ridder newspaper chain. As part of that deal it immediately sold off 12 newspapers for a profit, generating a tax bill that will be offset by the loss on the Star Tribune. That tax benefit is worth $160 million, raising the total value of the deal to $690 million, the company said. McClatchy plans to use the money to pay down a portion of its projected $3.3 billion debt.

Pruitt said McClatchy has no plans to sell any other newspapers.

The newspaper industry has long been fighting circulation declines. More recently, classified advertising _ a pillar of the newspaper business model _ has come under attack by cheap or free Internet ads for jobs, cars, and homes. The Star Tribune has been no exception.

"Certainly in straight financial terms, based on what's been happening to circulation, ad revenue and earnings, it's a much tougher business than it was eight years ago," said Rick Edmonds, Media Business Analyst at the Poynter Institute in St. Petersburg, Fla.

So was buying the Star Tribune in 1998 a mistake for McClatchy? Pruitt said it wasn't. He said Avista paid an attractive price for the paper, and that the Star Tribune was the only paper it could sell at a loss to get a tax benefit at a time when McClatchy needs one. And he said McClatchy has collected more than $1 billion in cash flow from Star Tribune operations during those years.

"But there is no doubt we're selling the paper for less than we bought it for," he said. "The Star Tribune had several good years, where profits increased, and then in recent years it has lagged as revenues have underperformed."

McClatchy and Avista both said the Star Tribune's union contracts would remain in place.

Avista was founded in 2005 by seven former partners and nine former professionals from DLJ Merchant Banking Partners, the private equity affiliate of Credit Suisse Group. This is Avista's first newspaper purchase, although it was widely reported to have shown an interest in the two Philadelphia newspapers when they were sold earlier this year.

"We think it's just a good time to buy. I think they've been oversold," said OhSang Kwon, a partner at Avista. "They're terrific platforms, they have very broad reach, and we think they're going to be around for a long long time."

He said Avista has no plans to flip the Star Tribune for a quick profit, but that it is still sorting out its long-term strategy for the newspaper.

Star Tribune Publisher and President Keith Moyer told Star Tribune employees in an e-mail that he would report to Chris Harte, a member of Avista's executive advisory board, who will also be named the newspaper's chairman. Harte is also a director at San Antonio-based direct marketing company Harte Hanks Inc.

Star Tribune columnist Doug Grow said workers were scrambling around the Internet trying to understand who Avista is.

"Everything we've heard from McClatchy recently is 'Hey, we're all in this together. We don't do layoffs.' Blah blah blah BS," he said.

The 1998 sale by Cowles Media Co. ended decades of family ownership for the Star Tribune.

"As much as you hated the idea of local ownership disappearing, which it did, and ending up as part of a chain, at least it was a chain in the newspaper business," Grow said.

Newspaper industry analyst John Morton found the sale "inexplicable and disappointing."

"The Minneapolis Star Tribune has a good reputation, has always had a good reputation. It is the kind of newspaper that you would have hoped a company like McClatchy would continue to own," he said.

"Clearly what is happening to McClatchy is that they are much more concerned about their overall financial performance than they are about publishing newspapers, the way I read it," Morton said.

Star Tribune newsroom employees were already facing the prospect of a change after editor Anders Gyllenhaal said on Dec. 15 that he was leaving to become executive editor of the Miami Herald.

The Star Tribune is the nation's 15th largest paper, with a circulation of 358,887, according to figures reported in October by the Audit Bureau of Circulations.

Copyright 2006 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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