Avista Gives Star Trib Union An Ultimatum

Months after defaulting on its massive debt load, Avista Capital’s troubled newspaper investment continues to create negative headlines.

The private equity firm’s latest attempt to save its investment in Star Tribune is an ultimatum to the paper’s union: Cough up $20 million in employee givebacks, or else this ship is goin down. And by down I mean Chapter 11, in the next six weeks.

Reports the Tribune: “Without help from the unions, Harte said, the company may have to file a Chapter 11 bankruptcy petition.”

That $20 million is in addition to the $50 million achieved in the last year through attrition, layoffs, buyouts, and expense reduction.

That must be a tough call for employees to make—take a pay cut or lose your job? I know a few laid off Wall Streeters would gladly take a lower salary in exchange for work right now, but the pay scale is just a little different in journalism. Star Trib’s journalists start at around 37K, and graduate to 69K after six years.

Anyways, I’ve discussed Avista’s handling of this deal at length. The firm overlevered a company in a declining industry and had no good plan for replacing lost revenueon things like classifieds and less subscribers (at least, no disclosed plan). The situation has raised the macro-question: Will there eventually be some cities without its own metro newspaper, or would the Star Tribune have failed without Avista’s bungling? Ad Age poses the question (without using the word “bungle”) here.

A smaller question, of course, is what will this do to Avista’s fundraising? The firm is one third of the way toward raising its second fund, which has a $3 billion target. This week Avista reportedly held a first close at slightly lower than it had planned. Not helping the matter is the near-impossible fundraising environment, even for firms without eyesores like the Star Trib deal.

I understand Avista paid around 7x to 8x cash flow for the company, which looked like a deal when the major newspapers were trading at 10-13x. But now big regional daily papers are being valued at around 5-6x. Furthermore, Avista threw in 18% equity for a company that was already hurting from advertising migration. Online development aside, what kind of investor piles debt on an ailing operation?

Earlier: Why Did Avista’s Newspaper Investment Fall Apart?, Star Tribune Part Two: Why One Big Blowup Could Ruin It For Everyone, Avista Coming In Short For Second Fund