Sun Joins a Growing List of Papers That Investors Aim to Take Private

Investor dissatisfaction spurred the breakup of the venerable Knight Ridder newspaper chain, which was bought by McClatchy in March. And it is doing the same to Tribune. Even the New York Times Co. is not immune to the pressures: Earlier this year, two investment firms protested the Times's dual-class stock ownership, which allows the controlling Sulzberger family super-voting power over ordinary stockholders, who are upset over the company's performance.

And at the Philadelphia Inquirer and the Philadelphia Daily News, which were bought four months ago by a group led by a local advertising executive, the union that represents about 40 percent of the papers' employees voted to authorize a strike. The owners said last week that they would cut jobs due to a decline in ad sales.

Unlike publicly held companies, private-equity partnerships pool money from a small number of investors and typically look for ailing businesses to buy at low prices. Sometimes they have a turnaround strategy, but often the strategy is to squeeze out the remaining earnings from a sick company, sell it as scrap and move on.

Or: "Calculate the leverage you can hang on [a property] based on cash flow, determine how quickly you can suck dividends out of it, then put lipstick on it and sell it," said a private-equity executive who requested anonymity because he is working on current transactions.

On the face of it, newspapers seem an odd fit with private equity, which usually demands the sort of high returns newspapers no longer can deliver. Newspapers do, however, generate steady cash flow, which often matters more to private investors than to Wall Street.

Yet newspapers have become targets of equity buyouts because of a confluence of events: Private-equity firms are awash in cash and need something to buy. Lenders, similarly, want to make loans to help fund the transactions. Newspapers, beset by falling stock prices, are starting to look like a bargain.

"Newspapers are not a sexy business. And some of the fundamentals are going the wrong way," said Perry W. Steiner, a partner at the private-equity firm Arlington Capital Partners. "But they're going the wrong way very slowly."

Steiner compared newspapers with the Yellow Book and other ink-on-paper phone listings. Private-equity firms have been "gobbling up" the books in recent years, even though the trend is toward online listings. Like newspapers, phone-listing books are a slow-growth but stable business, Steiner said.

Tribune, meanwhile, is the current darling of private-equity suitors. The company owns 11 newspapers, including the flagship Chicago Tribune, Los Angeles Times, Newsday and the Baltimore Sun, and 25 television stations. Tribune bought Times Mirror Co. in 2000, absorbing the Los Angeles Times and with it, the founding Chandler family, which has three seats on the Tribune board.

The stock suffered a steep slide in the first half of this year, and the Chandlers began agitating to break up or sell the company to recoup their investment. Since the boardroom dissent heated up and it became clear that some form of Tribune breakup was inevitable, the stock has rebounded to its high of a year ago.

Though Tribune is for sale, its individual pieces, such as the Sun, probably are not -- at least not yet. Tribune's tax burdens of selling individual newspapers would be high enough to discourage such a strategy. A more likely scenario would be to split the broadcast and newspaper interests and sell each, or sell the entire company to one buyer, who then would be able to sell off the less profitable pieces without incurring the large tax bill.

The latter would be the Venetoulis play, but he knows it's far down the line. "This may not happen," said Venetoulis, 69, who runs two small publishing businesses and once owned several small suburban Baltimore newspapers that he sold to the Sun.

The Sun's daily circulation is about 236,000, down nearly 10 percent over the past year.

Venetoulis said his group did not want to discuss its estimated value of the Sun newspapers. The group listed Bank of America, SunTrust Bank, M&T Bank and Wachovia as interested lenders, according to a letter Venetoulis sent Oct. 20 to Tribune's chairman and chief executive, Dennis FitzSimons. Venetoulis said his group would use loans to augment its investment, but would try to avoid bringing in a private-equity partner.

"They like to flip [businesses] and make as much as they can for their shareholders," he said. "That's fine, but we're long-term shareholders and that might not interest them."