At 4 p.m. Monday, the deadline passed for Star Tribune shareholders to object to Wayzata Investment Partners gaining majority control of the state’s largest newspaper. Did two-thirds of shareholders block Wayzata’s attempt to go from 49.8 to 58.2 percent?
Strib officials won’t tell until they’ve sent shareholders an official letter — “soon,” says the newspaper’s board chair, Mike Sweeney.
Whether now or later, the secretive Lake Minnetonka private equity firm is widely expected to gain control, giving them unchallenged power to determine the paper’s course and, in the event of a sale, its next owner.
Sweeney calls Wayzata “the ideal partner — they’ve never tried to influence news or editorial policy and they have been very supportive of business management as well.”
But what do we know of Wayzata, a firm that puts the “private” in private equity?
A call for an interview received a curt “they would have no comment on it, thank you,” from a receptionist who quickly hung up.
Calls around the financial community were either not returned or required anonymity. No one trash-talked the firm, which buys failing companies’ undervalued debt, re-jiggers operations, and then sells. Many were impressed Wayzata had grown six-fold in eight years, to $7.3 billion in assets under management – but few had dealt with the firm or wanted to talk about doing so.
However, in November, Wayzata’s top man was forced to step from behind the curtain. Managing partner Patrick Halloran testified before the Indiana Gaming Commission after one of his funds assumed control of a Majestic Holdco, which operates riverboat gambling in Gary.
As Halloran explained to the commission, “We manage five funds. … And the capital, most of it comes from state pension funds throughout the U.S. That includes Indiana Public Employee Retirement Fund. So we have capital that’s long-term capital.” (See sidebar for more details.)
Asked how long Wayzata held investments, Halloran replied, “It can range anywhere from three to seven years. On average it’s probably around five, five and a half years.”
If you’re keeping score, they’re about four years in with the Strib.
Strib owner, Delta owner
A few other Wayzata investments appear in government filings. The biggest by far is also big locally: Delta Airlines. The Strib covers the airline’s fortress hub more than most neighborhoods, and Wayzata is a top five Delta investor, with a 4.1 percent, $330 million stake.
Wayzata’s political contributions are as rare as its investment disclosure. Halloran has precisely one in federal and state databases – a $2,000 donation to Minneapolis Mayor R.T. Rybak’s 2010 gubernatorial campaign.
What’s the connection? Halloran — who lives on a bay near Minnetonka Beach’s Lafayette Club, not the Mill City — isn’t talking. According to Rybak, “Although I don’t have a personal relationship with Patrick Halloran, I was proud to receive many, many contributions from members of Minnesota’s business community, including him.”
The only other Wayzata donor is company lawyer Stephen Adams, who gave approximately $2,500 to Norm Coleman, Tim Pawlenty, Erik Paulsen and the state Republican Party since 2004.
Buying for pennies on the dollar
Wayzata makes its money by being smarter than the last guys. In the Strib’s case, that was Avista Capital Partners, which paid a whopping $530 million for the Strib in 2007 (itself a comedown from the $1.4 billion-plus McClatchy Co. paid for parent Cowles Media in 1997). As the Strib hurtled toward bankruptcy, Wayzata bought roughly a quarter of the Strib’s debt for pennies on the dollar. When the company was restructured, Wayzata held about that share of its resulting $100 million debt and newly created stock.
At the time, New York leveraged buyout firm Angelo, Gordon & Co. was the lead creditor and its vice president, Bradley Pattelli, organized the paper’s board, which remains intact. By 2011, Pattelli had left Angelo, Gordon & Co. and Wayzata bought the New York firm’s stake.
Now, Wayzata hopes to gain shareholder approval to buy the stake of Credit Suisse, another member of the five-member creditor’s committee during bankruptcy. (Credit Suisse, by the way, provided investors when Wayzata’s managers left Cargill, Inc. in 2004.) The only other major shareholder is another post-bankruptcy creditor, GE Capital.
Glen Taylor: still a player
What does Wayzata plan to do with the Strib? Selling is clearly the ultimate goal, given the firm’s history. But so far, one public effort has met with failure.
Sweeney’s letter noted 2009 entreaties from the Atticus Fund, the Glen Taylor/Vance Opperman investment vehicle. The duo bid $16.41 a share — far below the $32 Wayzata will pay Credit Suisse under a pre-existing shareholder agreement. “Atticus could be a potential purchaser” of Wayzata’s shares, Sweeney told stockholders.
Three years ago, a buyer had an outside shot at controlling the company without Wayzata’s stake; that’s almost certainly impossible now. According to sources familiar with the effort, Taylor (who owns the Minnesota Timberwolves and Mankato-based Taylor Corp.) is still trying to assemble an unidentified consortium of local businesspeople. Taylor did not return a call for comment, but Opperman said he’s no longer one of the leaders.
“I’ve taken a much more passive interest,” said the former West Publishing exec, who owns Mpls.St.Paul Magazine among other investments. If the parties ever agree on a valuation “and the local effort moves forward, I would hope to be part of a group.”
Cash flowing, for now
How valuable is the Strib? At $32 a share, the Strib’s equity would be worth $49 million, the paper reported July 3. But publisher Mike Klingensmith, a former Time. Inc. finance guy, cautioned that it was “not appropriate to presume” that’s the company’s price.
One businessperson who’s been approached speculated Wayzata might sell for less than $32 a share, when blended with the firm’s previous, cheaper purchases.
Another scoffs at that, noting Wayzata didn’t grow fantastically by selling low, certainly not lower than the per-share price they’ve now offered to pay. The Strib produces cash flow in the tens of millions, and has never needed to tap post-bankruptcy owners for more cash.
As most people know, the Strib is sitting on five acres of downtown land in or next to the new Vikings stadium site; if a sale price approaches the $45 million the Vikings offered in 2007, that asset alone would almost equal a $32-per-share valuation.
According to Strib agreements, any land proceeds must pay down the newspaper’s debt, which stood at $100 million post-bankruptcy but is now down to $70 million following a voluntary $15 million payment earlier this year. (Managers made a similar payment in 2010.)
Drastically reduced debt would mean plunging payments. That would free up revenue for profit-taking, reinvestment, or counteracting print-side ad declines.
Regardless of the land sale, Sweeney says Wayzata has told him there would be no changes in the paper’s board or management, and that newsroom staffing would remain stable.
“The journalistic mission is at the core of what we do; we have the right numbers, and expect to make strategic hires going forward” Sweeney declares.
If Wayzata is angling for a sale, there are still plenty of risks to give buyers pause. There’s no buyer for the land yet, so its value is unknown. Falling interest rates have hurt Strib pension funds, since they devalue the projected investment return from assets. (The Strib, which froze pensions post-bankruptcy, used cash in 2011 to boost fund balances rather than pay down debt.) Ad sales could tumble off the precipice like they have in the recent past. The Strib has goosed revenues by instituting pay walls and its first circulation hike in a decade, but it’s hard to do that every year.
Finally, there are restive employees who – even with discretionary profit sharing – won’t suffer pay freezes forever, especially with ownership poised to bank millions.
Though staffers I’ve spoken to speak well of Klingensmith, Wayzata does have a track record of hardballing unions. In 2008, Oregon millworkers traveled to Wayzata – fruitlessly — to protest their wholesale replacement.
Still, it’s worth remembering that newsroom employment has held steady during Wayzata’s reign, at a time when competitors have resumed buyouts and layoffs. For now, the Strib building’s not burning, and the smart money is rushing in, not out.