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http://blogs.citypages.com/blotter/2008/05/how_bad_is_it_f.php

How bad is it for the Strib?: Questions and answers from independent reports
Filed under: Media

Reporters examining the Star Tribune’s finances can be compared to a group of blind men reporting on an elephant. No one source, not even the paper’s higher-ups themselves, seems to have all the answers.

Here, we’ve isolated some critical outstanding issues that everyone is wondering about. Using industry reports and outside sources, we offer the following informed speculation on where the paper stands now and what’s to come.

How bad is it for the Strib financially?

Unclear, but not a disaster so far. Industry reports on the Strib’s fiscal health are surprisingly sanguine. Dun & Bradstreet is the leading provider of credit information on businesses and corporations. We acquired their comprehensive reports on both the Star Tribune and its parent company, Avista Capital Partners.

The likelihood that the Strib “will experience financial distress in the next 12 months” or “will not pay [its creditors] on time over the next 12 months” is listed as “low,” and is well within the zone considered safe. In 2007, firms with this classification had a failure rate of just 1.2 percent.

This does mean that the Strib’s version of events (they’ve successfully paid debts up until now, and are looking to restructure financial obligations to avoid a future day of reckoning) is more likely to be true than the Post’s doom-and-gloom scenario. This does not mean there aren’t gathering storm clouds.

The data is not all rosy — the Strib gets a mixed rating compared to its media company peers — but it’s not ashes and sackcloth, either.

Why is this story coming to light now?

Multiple possibilities. The hiring of private equity firm Blackstone Group to help sort out upcoming financial challenges is certainly newsworthy, so maybe the Occam’s Razor explanation — the press discovered new information and ran with it — is valid.

But I talked with two financial services experts not connected with the situation yesterday, and each offered a different possible theory about why the New York Post story hit at this time. Either are plausible. Neither is necessarily mutually exclusive from the other.

One, a longtime national business journalist, floated the possibility that Avista themselves leaked the story in advance of trying to sell the Strib. With media companies proving to be a less profitable investment than other capital strategies, it’s possible that the firm has decided to sell and is using this story to fuel perception that the paper can be had for a bargain-basement price. Another source, a former CEO, said the timing of the story suggests it’s a tool to use in upcoming labor negotiations.

Both of these are speculative opinions, to be sure, but both are possibilities that locals have considered as well. We have calls in to both Blackstone and Avista that have gone unreturned thus far. We will update this post as new information becomes available.

What are the chances this is a scare tactic in the pending labor negotiations with the Guild?

Possible. As MinnPost’s David Brauer has noted, the union is skeptical about the story’s timing, and I think they have good reason to be. Aside from the obvious — contract negotiations begin next week, and this is a weighty cudgel for management to swing — labor costs are among the Strib’s most significant expenses.

More on the reasoning behind this in the next answer.

What powers will the Blackwell Group have? How has Blackwell acted in past instances where they were so empowered?

A primary part of Blackstone’s strategy has been reducing labor costs, including reducing wages among unionized staff. During its work with Delta during the airline’s bankruptcy, union pilots were asked to take a pay cut of 30 percent.

This is a different situation than Delta’s, because there is no Chapter 11 filing (at least not yet). A better example might be Blackstone’s work with Xerox in 2001.

Rumors of impending bankruptcy started to swirl when the company hired Blackstone. In about a year’s time, Xerox came back from the brink — after shedding 10 percent of the workforce.

Yes, there were other measures taken, like raising capital and “improving operational efficiency.” But there’s a pattern here of slashed wages and layoffs. For a fascinating background on firms like Blackstone, which are largely unregulated, I recommend the In These Times story “Pirates of Private Equity.”

Given the $4.1 billion acquisition of Bristol Myers Squibb on Friday, could Avista be trying to liquidify cash for this deal?

Highly unlikely. Avista has Scrooge McDuck money. Because they aren’t a public company, financial data on them is limited, but we were able to run down some hard facts.

The Dun & Bradstreet report on Avista rates their financial health as very high, and their credit risk as extremely low. The report says their financial stress is minimal and the likelihood they’ll experience cash flow problems over the next 12 months quite small. Even compared to other wealthy private equity partnerships, their balance sheet is favorable.

Buying Bristol Myers Squibb to them is probably like buying a new car to you and me. A significant investment, but not one likely to require freeing up capital.

Posted by Jeff Shaw at May 6, 2008 6:39 AM