Less than a year after New York's Avista Capital Partners bought the Minneapolis Star Tribune from the McClatchy Co., the investment has “gone so sour” that if there is no monetary infusion or Avista does not hold a firesale, bankruptcy may be the only way out, Followthemedia's Philip Stone wrote Thursday.

“One has to assume that the Avista people are not stupid – they went through the Star Tribune's books, they saw the cash flow, they thought (they) knew what they were getting into, believing that the cash flow would handle debt and operate the business with very little need for any major cutbacks,” Stone states. “And yet in less than a year that investment has gone so sour that although the newspaper insists it is not in a bankruptcy situation and it can still handle debt this year, it has brought in a another private equity firm to analyse its balance sheet.”

When Avista bought the Star Tribune, many industry experts thought McClatchy was the one not getting a fair deal, as the company had paid US$1.2 billion for the Minnesota newspaper nine years before. Avista invested $100 million of its own money into the deal, and borrowed another $430 million. Now, it has announced it has written down the value of the $100 million investment by 75 percent, states Roy Greenslade in his Media Guardian blog.

“The outlook in the near to medium term remains uncertain,” Avista said in a statement, according to a Star Tribune article Tuesday. “The Star Tribune currently has sufficient liquidity and is up to date on all its debt payment obligations.”

Although there was a report over the weekend by the New York Post that the Star Tribune has failed to meet its debt obligations and is “on the brink of bankruptcy,” the newspaper has denied that claim.

The Star Tribune's weekday circulation was down 6.74 percent, to 321,984, in the six month period ending March 31, the paper reported last week. However, dwindling circulation, a fact most U.S. newspapers are facing, coupled with Avista's hiring of the Blackstone Group to analyse the company's finances, “hardly merits a conclusion that we are near bankruptcy,” Publisher Chris Harte said in a statement, according to a Pioneer Press article. “In fact, Blackstone has substantial expertise in balance sheet restructurings through means other than statutory proceedings like bankruptcy.”

Harte also stated that although the newspaper has begun negotiating contracts with it largest union, which represents editorial and newsroom employees, and some in the circulation department, “none of the current discussions we are having about our financial structure has any effect on our current operations, which are generating positive cash flow,” the Pioneer Press reported.

However, Stone points out, Avista has acknowledged that cost savings (meaning staff cuts) won't do enough to fix current financial woes. If advertising doesn't pick up fast, financial restructuring will be next, he predicts.

“Minneapolis is frightening for showing how quickly things can go wrong,” Stone states in his Followthemedia blog. “'Analyze its balance sheet' is usually a eupherism meaning that in order to get more money then some equity is going to have to change hands. But the question is with the newspaper in such dire financial straights even if the current owners held their own firesale would anyone come?”

And as banks aren't looking to take on newspaper equity, it's likely that Avista will either look for a buyer or invest more money in the flailing newspaper, Stone states.

“All eyes are now on the (Star Tribune),” Greenslade writes. “Can it stave off bankruptcy? If it doesn't, it could prove to be the first of many dominos to fall across America's once-mighty press.”