|
RELATED RESOURCES |
Big as the deal was, it promises a second round over the next several months, which could be just as scintillating.
At the high-anxiety end of the spectrum, 12 papers, including The Philadelphia Inquirer and San Jose Mercury News, have been left behind by the new McClatchy. In addition, the company was quite explicit that those markets, most of them in the rust belt, flunked as high-growth communities, a strategic prerequisite for McClatchy.
Click here to view breakdown by state of McClatchy properties before and after KR purchase.
That doesn't mean, though, that no one wants them, that any will go out of business, or that their certain fate will be still more deep cuts of news staff and other expenses.
McClatchy CEO Gary Pruitt told investors and analysts that the 12 papers have a running start from being on the market since November, that there have been many expressions of interest, and that he might have homes for most or all of them by the time the Knight Ridder deal closes in early summer.
First in the line of prospects would be Gannett (for some of the mid-sized papers) and MediaNews (for San Jose, Contra Costa and Philadelphia). The Gannett way seems to yield profitable operations in both fast-growing and slower-growing markets. MediaNews's William Dean Singleton is an enthusiastic and expansionary CEO. He already has several papers in California, and Philadelphia might be a fit with big-city ambitions.
There is a longer and more intriguing list of buyers. The Newspaper Guild has expressed interest and found a financial backer for a run at Knight-Ridder's eight unionized papers. All but one, the Lexington Herald-Leader, are among those to be divested.
The second-round auction might also surface wealthy individuals or nonprofits that can take the papers private, out of the Wall Street earnings treadmill, and put community service ahead of high margins.
The auction had been viewed as a referendum on how investors view the industry, and the result carried mixed tidings -- neither fabulous nor terrible. It certainly beat such possibilities as Knight Ridder not finding a buyer or going to a private equity group looking to make deep cuts and flip the properties in three to five years.
Howard Weaver: "This is a mixed day for journalism." (Read full interview)But the closing price of $67.25 per share was only so-so, a multiple of 9.5 times projected cash flow versus the recent norm of a 13 or 14 times multiple. "I see it as negative," said Lauren Rich Fine, Merrill Lynch analyst and a member of Poynter's National Advisory Board. "When the private (acquisition) price is close to the public price, that suggests the public may be overvaluing the industry."
There was no abrupt movement in McClatchy's stock, down about 3 percent, or that of other newspaper companies, which is to say that the market didn't react strongly one way or another.
Does this presage a domino effect in which other public companies are acquisition targets? Probably not, said Fine. Most have the protection of a family control of voting stock (like McClatchy or The New York Times Company) so institutional investors don't have the leverage they did at Knight Ridder to force a sale. Neither the price nor the small field of ultimate bidders would encourage other such deals.
Fine has suggested in written reports last year that Tribune is a problem performer and may come under pressure to restructure. But who is big enough to buy the whole thing? Only Gannett, and the company does not appear interested.
The other story to play out will be the integration of 20 Knight Ridder papers into McClatchy. While Pruitt's talk of "excellent fit" and shared devotion to "independent public interest reporting and the highest ethical values" may sound like a polite aside, he made a convincing case for compatability.
McClatchy is adding papers in 10 states. Those markets have a comparable household growth rate �- about 50 percent above the national average -- to its previous stable of 12 and come close to the same level of profitability. That implies they don't have to do something greatly different to fit in or make big cuts. And McClatchy repeated a longstanding policy of avoiding newsroom layoffs.
The merger comes with a big cost savings -- $40 million a year, Pruitt said, in eliminating duplicative corporate overhead. And he expects to realize another $20 million in expense reductions from operating synergies.
�From an online perspective," Fine said, "they appear to be two of the companies doing best. Pruitt even ventured an optimistic prediction that "in five years, online classified advertising revenue could be pretty darn close to print."
One potential challenge is retaining Knight Ridder's one-third share in CareerBuilder's online job advertising. The other two partners �- Gannett and Tribune �- could buy that share out, but McClatchy would bring its markets as an operating partner.
Racking it all up, it was a win-win day for McClatchy, the acquired papers and the journalists who work there. I'd mark down the orphan 12 as uncertain but not without hopes. And Bruce Sherman of Private Capital Management, who started rattling sabers November 1 when Knight Ridder stock was at $52 a share, walks away at $67, easing his pain to the tune of nearly 30 percent.
