Timing of Possible Sale May Work Against Knight Ridder

The money managers who successfully prodded Knight Ridder Inc. to put itself on the market might have picked a more advantageous moment.

San Jose-based Knight Ridder, like other big-city newspaper chains, is suffering from chronic circulation and advertising declines, but there’s also the persistent background buzz that the industry has its rear legs in a tar pit with nothing between it and extinction except a certain amount of useless thrashing.

Although much the same was said of radio at the dawn of television, the gloom over the competition that newspapers face from the Internet is hardly conducive to a bidding war for Knight Ridder and its collection of 32 daily papers.

Industry watchers nevertheless expect a number of potential buyers to at least look over the merchandise when Knight Ridder’s investment banker, Goldman, Sachs & Co., starts presenting its sales pitch in a few weeks.

Bidders could include newspaper companies, cash-flush private equity firms and -- if Knight Ridder decides to break itself up and sell off individual properties -- newspaper employee groups or major hometown investors.

Of course, there’s no guarantee that a sale will happen. Analysts such as Craig A. Huber of Lehman Bros. and Lauren Rich Fine of Merrill Lynch are doubtful that Knight Ridder will attract a bid high enough to satisfy its biggest shareholders, led by Private Capital Management of Naples, Fla., which holds a stake of about 19%.

At the top of most lists of potential buyers is Gannett Co., parent of USA Today and the nation’s biggest newspaper company by circulation.

Among newspaper companies, “only Gannett would seem to have both the desire and the wherewithal to pull off a $5- or $6-billion purchase,” said analyst John Morton of Morton Research Inc. in Silver Spring, Md.

Gannett spokeswoman Tara J. Connell said the company wouldn’t comment on Knight Ridder specifically, but added: “I will say what we have been saying for years, which is that we’ll look at anything that goes on the market.”

Huber, in a report to Lehman clients this week, said that although Gannett could afford Knight Ridder, it might be better off making broadcasting or Internet acquisitions or even buying back its own shares.

Tribune Co., Chicago-based parent of the Los Angeles Times, might be attracted to a company with big newspapers in Philadelphia, Miami and San Jose to add to its own holdings in Chicago, Los Angeles and New York.

Analyst Harold Vogel of Vogel Capital Management said that even if a Tribune-Knight Ridder combination could pass federal antitrust scrutiny, “the economic model doesn’t change. You’re just doubling up your bet on a troubled industry.”

Newspaper circulation in the United States has slipped by 9 million, or 14%, from a 1984 high of 63.3 million, as young readers increasingly flock to online news sources. As circulation has fallen, so has advertising. The decline has steepened in recent years, with classified ad revenue falling 15% from 2000 to 2004.

The industry has always been cyclical, as advertising spending tends to track the economy, but analysts have noted that the deterioration over the last few years has come despite reasonable U.S. economic growth.

Vogel, like many other observers, believes that with the Internet increasingly pulling readers away from newspapers, the industry faces further declines. Even so, he said, the business will generate cash for years to come, so there will be buyers for newspaper companies.

Aside from newspaper chains, the most frequently mentioned potential buyers are private equity firms, which have been building cash for years and are anxious to put their money to work. The structure probably would be a leveraged buyout, in which much of the purchase is paid for with borrowed money.

Firms such as Kohlberg Kravis Roberts & Co., Providence Equity Partners and Carlyle Group have been mentioned as possible suitors, but there are “any number of private equity funds” that could afford such a deal, alone or as part of a consortium, said James Walden, an analyst at Morningstar Inc. in Chicago.

But would they pay up?

Huber said that a sale price of $71 a share -- $6.2 billion total, including debt -- would be 11 times Knight Ridder’s estimated 2006 cash flow, at the low end of multiples at which newspaper companies have sold over the last five years.

That price, he said, is probably too low to satisfy Private Capital Management or Knight Ridder’s other major outside shareholders. At the same time, given the borrowing costs that such a deal would entail, he said the price is too high to generate more than a low single-digit annual return for the private equity shops -- far too low for the risk involved.

Henry R. Berghoef, chief of research at Chicago-based Harris Associates, which owns 8.5% of Knight Ridder and has joined Private Capital Management’s call for a sale, said of the newspaper industry, “I think the doom and gloom is overblown.”

Although defending their classified advertising business against Internet competition is “a particular challenge” for newspapers, he questioned why historical multiples of 12 or 13 times cash flow shouldn’t continue to hold.

That would imply a value of $80 a share or more for Knight Ridder.

The company’s shares closed at a multiyear low of $52.58 on Oct. 21. The shares have rallied 16.8% since Private Capital Management began agitating for a sale Nov. 1 and closed Friday at $62.33, up 15 cents. The last time the stock closed near $71 -- Huber’s theoretical selling price -- was more than a year ago, at $70.99 on Nov. 5, 2004.

Berghoef complained that Knight Ridder’s stock had traded far below its “intrinsic value” -- or breakup value -- although he declined to say what he thought that value was.

If Knight Ridder’s board of directors was unwilling or unable to find a buyer for the whole company, it could opt to sell some of the properties individually. An obstacle to that approach is that it might trigger large capital-gains taxes, since the newspapers are on the books at only a fraction of their market value, experts said. Berghoef said there might be ways to structure a breakup to avoid that problem.

In any case, some potential buyers of the pieces might be less profit-conscious than Wall Street investors.

Consider newspaper employees, who increasingly have been subject to layoffs and cuts in pension and health benefits as the industry struggles to reduce costs.

“An employee buyout is intriguing to think about, but at this stage it’s way premature to speculate,” said Linda K. Foley, president of the Newspaper Guild, the union representing 3,000 Knight Ridder workers at the Philadelphia Inquirer, San Jose Mercury News and Detroit Free Press, among others.

“We do intend to be a player in any case, to make sure our concerns and issues are addressed,” Foley said.

Other possible bidders might be wealthy individuals who, for reasons of ego or civic-mindedness, would want to buy their hometown papers.

The idea is not without precedent. Billionaire entertainment mogul David Geffen met with Tribune Chief Executive Dennis J. FitzSimons last summer to say he was interested in buying The Times, according to three civic figures in Los Angeles. FitzSimons’ answer was that the paper was not for sale.

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Times staff writers Joseph Menn in San Francisco and James F. Peltz in Los Angeles contributed to this report.