Knight Ridder Board Must Weigh Bids, Chain's Value

By Jack Robinson

March 11, 2006 12 AM PT

Times Staff Writer

The easy job for directors of newspaper giant Knight Ridder Inc. this weekend may be choosing the best of at least two offers for the company, experts said Friday.

The tougher question: whether to sell at all.

Neither Knight Ridder nor its suitors are talking, but news accounts have identified McClatchy Co., owner of the Sacramento Bee and 11 other daily newspapers, as the top bidder. The deal could turn the mid-size Sacramento-based company into the nation’s No. 2 newspaper chain in terms of circulation, after McLean, Va.-based Gannett Co.

McClatchy reportedly is offering a combination of cash and stock worth $65 to $70 a share. That means spending $4.4 billion to $4.7 billion for San Jose-based Knight Ridder, which publishes the San Jose Mercury News, the Philadelphia Inquirer, the Miami Herald and 29 other dailies.

Shares in both companies surged Friday as investors welcomed the possible deal four months after the company invited bidders. Knight Ridder rose $2.34, or nearly 4%, to $65. McClatchy rose $1.31, or 2.5%, to $53.24.

But some analysts are unenthusiastic.

“At the price they’ve been talking, it wouldn’t surprise me if the Knight Ridder board decided to pull back and not sell the company,” said veteran industry analyst John Morton, who described the McClatchy bid as “a low-ball offer.”

The price reflects undue investor pessimism about the industry, said Morton, who believes that newspapers stand to benefit from increasing Internet revenue even as their traditional print business declines. Knight Ridder directors could decide instead to repurchase shares, he said.

Others say the reported McClatchy offer, worth as much as 10 times Knight Ridder’s earnings last year, is a respectable price, given the newspaper industry’s long circulation slump.

“We think it’s very likely the company will sell,” said Michael Kupinski, an analyst with A.G. Edwards & Sons Inc. Kupinski said the reported bid was probably in his firm’s target range of $68 to $74 a share.

Although much smaller than its target, McClatchy “has a very pristine balance sheet,” he said, and is able to borrow -- and repay -- what it would need to buy Knight Ridder.

Knight Ridder put itself on the auction block in mid-November after investors -- notably Private Capital Management, its largest shareholder -- complained about its persistently low stock price.

The firm’s chief executive, Bruce Sherman, did not return calls for comment.

Knight Ridder, with a market capitalization of about $4.4 billion, earned $471 million on sales of $3 billion last year, but its share price dropped more than 20% in 2005 before recovering on prospects of a sale.

People familiar with the situation stress that anything could happen this weekend, as Knight Ridder directors meet to consider offers submitted by Thursday’s deadline.

A group of five private investment firms also made an offer, and two other newspaper chains -- MediaNews Group Inc. and Gannett -- also have expressed interest.

Knight Ridder is likely to favor buyers with strong journalistic credentials like McClatchy, which is respected in media circles as well as on Wall Street. “I’m not surprised that McClatchy is one of the leading bidders,” analyst Kupinski said. “I think culturally they fit well together.”

He believes that the two companies fit together geographically as well. Both own newspapers from coast to coast but have clusters in some similar areas that could allow sharing of administrative and other expenses.

In California, for example, McClatchy owns four papers east of the Bay Area -- in Sacramento, Modesto, Fresno and Merced. Knight Ridder owns four papers in Northern and Central California -- in Walnut Creek, San Jose, Monterey and San Luis Obispo.

The two also have papers in Washington state and South Carolina. In North Carolina, Knight Ridder serves the largest city, Charlotte, and McClatchy serves Raleigh, the second-largest.

“Whenever you have two newspapers within a reasonable geographic range, there usually are opportunities” to save money on promotion and administration, analyst Morton said.

The geographic overlap may create a problem in one market, however. McClatchy owns the biggest newspaper in Minnesota, the Star Tribune of Minneapolis, and Knight Ridder owns the nearby St. Paul Pioneer Press. The two serve readers in the state’s largest metropolitan area.

Kupinski of A.G. Edwards doesn’t believe federal antitrust regulators would object. “I don’t think that’s a big stumbling block,” as long as the papers are kept separate editorially, he said.

But others disagree. McClatchy, should it buy Knight Ridder, “more than likely would have to spin off St. Paul,” Morton said. “I couldn’t imagine the antitrust [regulators] would allow them to own both St. Paul and Minneapolis.”

USC law school Dean Matthew Spitzer said it would depend on how many potential readers the two newspapers had in common. “You’d have to look to see if these newspapers really do compete,” Spitzer said. “If the answer is no, it’s not really an antitrust problem.”

McClatchy probably would sell off some Knight Ridder assets in any case, as it did in 1998 when it bought Cowles Media Co., the parent company of the Star Tribune, analysts said.

For employees of the Pioneer Press, there are many uncertainties, said columnist Ruben Rosario, such as who would end up owning the paper if McClatchy acquired Knight Ridder.

“We’re all concerned,” he said. “But nobody’s jumping off the ledge yet.”

(BEGIN TEXT OF INFOBOX)

At a glance

Knight Ridder Inc.

Founded: 1974, through a merger of Knight Newspapers Inc. and Ridder Publications Inc.

Headquarters: San Jose

Chief executive: P. Anthony “Tony” Ridder

Newspapers: 32 dailies, including the Philadelphia Inquirer, the Miami Herald and the San Jose Mercury News

Daily circulation: 3.4 million

Employees: 18,000

2005 revenue: $3 billion (up 2.1% from 2004)

2005 net income: $471.4 million (up 44.5% from 2004)