Lee Bought Pulitzer Last Year for 13.5 times Earnings Yet McClatchy Paid Just 9.5 times Earnings For Knight-Ridder. What Does That Tell You About the Value of Newspapers Today?

Just last year Lee Enterprises bought Pulitzer for 13.5 times earnings. K-R sold for 9.5 times earnings. Did Lee pay too much, or are there problems with some of those K-R newspapers in non-growth markets that are more trouble than they are financially worth?

McClatchy understood the risk of some of those K-R properties but also knew K-R insisted on selling the group as a whole. K-R would not permit piecemeal sales. So McClatchy took the lot for very little premium over the current share price (but 26% over the share price the day before K-R was told by its three largest shareholders to put itself up for sale) and then instantly put 12 of the 32 newspapers up for sale.

McClatchy has a pretty good strategy of only investing in what it calls high growth markets. It considers Miami high growth and is holding onto the Herald, but it wants nothing to do, for instance, with the two Philadelphia newspapers. Going into the deal McClatchy owned 12 daily newspapers and was one of the best performing newspaper groups in the country, but when the K-R deal is complete and it has sold off those K-R newspapers it doesn’t want it jumps to a 32-daily newspaper chain with a daily circulation of some 3.2 million – second only to Gannett.

ftm background

When Knight-Ridder’s Largest Shareholder Told the Company To Sell Itself, The Shares of Most Newspapers Companies Jumped In the Hope This Was the Start of Good Times Ahead. Actually It Was The Start of That Shareholder Dumping Some $2 Billion Worth of Shares Involving Nine Newspaper Groups
Last November, the largest shareholder in US newspaper shares shocked Wall Street by demanding that Knight-Ridder (K-R) put itself up for sale to enhance shareholder value. The next two largest shareholders joined in and the die was cast. Shares in K-R and most other publicly quoted companies rose strongly and immediately on the hope this was just the start of improving shareholder value for that market sector.

Dow Jones Dumps Its Wall Street Journal Publisher and Kicks Her Husband, the Company’s CEO, Upstairs Temporarily to Chairman, Wall Street Rejoices With A One-Day 10% Share Price Increase And With Knight-Ridder For Sale, Traders May Finally Be Seeing Some Results They Like From US Newspapers.
Tony Ridder didn’t have much choice. His three largest shareholders said they wanted to see Knight-Ridder sold to achieve shareholder value and there wasn’t much he could do about it and the sales process is in full swing. But Dow Jones is another matter. While a public company it is still controlled by the Bancroft family and the family really hasn’t been that active in pushing for a better performance. Until now. In one swoop the company ceo is out come February 1 -- kicked upstairs as chairman until he retires in a year -- and his wife, the Wall Street Journal (WSJ) publisher, has been given two months to pack up her office.

US Newspaper Executives Tell Wall Street This Week Their 2006 Prognosis But the Real Story is That Knight-Ridder Won’t Be Presenting – It’s In the Midst Of Being Forced to Try and Sell Itself -- And That’s the Real Future That Many of Them Don’t Want to Talk About!
When the major US publishing companies give their various reports to the 33rd annual UBS Media Week Conference and to the Credit Suisse First Boston media meeting this week the shadow of who is not there will be overwhelming. Knight-Ridder’s prognosis is already known – its three main shareholders want it sold to gain shareholder value, and many of those other newspaper companies – especially those without family protection on their shareholdings – fear they could soon be in the same boat.

“Private Capital Management (PCM) Has $4 Billion Invested in US Newspapers. What Do They Know That We Don’t”? – FTM Sept, 2005; PCM Tells Knight-Ridder To Put Itself Up For Sale
In what must be considered a very gloomy assessment of the US newspaper business, one of its largest institutional investors has seemingly lost patience with the industry being able to turn itself around, and has now urged Knight-Ridder (K-R), the country’s second largest newspaper chain, to put itself up for sale.

New York Times Company and Knight-Ridder Announce Further Layoffs Based on Glum Advertising Forecasts Triggering Major Sell-Offs As Major US Newspaper Groups See Their Shares Sink Below 52-Week Lows
It was only last May that the New York Times Company announced 195 layoffs so another internal “Arthur” and “Janet” note this week so soon afterwards announcing another 500 employees are to go – 4% of its workforce -- has rocked the US newspaper establishment. “Arthur” is Arthur Sulzberger Jr, chairman of the New York Times Company and publisher of the New York Times, and “Janet” is Janet Robinson, president and CEO. When they talk of hard times ahead the whole industry shudders.

Somewhat surprising, Silicon Valley is not considered high growth and the K-R flagship San Jose Mercury-News is to be dumped along with its Contra Costa neighbor – rather sad to this writer who started his first real newspaper job on the Mercury-News the day after he graduated from San Jose State, and who learned more in three months on the News’ copy desk than he did in four years of journalism courses! Won’t admit when that was but, as a clue, in those days it was only a Ridder newspaper and Tony Ridder was prowling the hallways and known just as the boss’ nephew!

Tony Ridder thought he sold his group to a newspaper chain with a high reputation for journalistic excellence and that would really look after it. He was not best pleased when he heard McClatchy was immediately going to sell 12 of the newspapers. Who to? Would those buyers have high journalistic reputations or would they just try and cut costs to the bone, including editorial, so those properties could be sold again at big profits? An uncertainty those affected K-R employees certainly didn’t need.

McClatchy CEO Gary Pruitt says that absolutely no deals have been done upfront to sell those 12 properties. All is very quiet on the Gannett and Media News (Dean Singleton) front. The likelihood is that they only wanted to buy specified papers and dropped out when that was turned down. Now that McClatchy bit that bullet and bought everything no doubt the Gannett, Media News and McClatchy phones are in constant connection.

McClatchy, to make the deal, bought newspapers that it didn’t want on the gamble – obviously its board thought not too much of a gamble – that it could sell off what it doesn’t want. Besides Gannett and Media News various local groups in the affected markets are being put together, the newspaper guild has already tied up with an equity company to finance purchase of the seven newspapers that have Guild representation– the most visible of those being in Philadelphia and San Jose – and private equity companies may still be lurking.

Unclear is what happens to the K-R investments with Gannett and Tribune in their joint web holdings that include Careerbuilder and Shoplocal. The two other partners could insist on buying McClatchy out of those properties although Pruitt said he’d like to retain the web investments. In making its decision on what to do with that joint venture Gannett, the country’s largest newspaper publisher, will need to decide what type of relationship it wants with McClatchy, now the country’s second largest newspaper publisher, especially if Gannett is looking to buy any of those 12 newspapers on the block.

Pruitt has already visited K-R’s largest shareholder, Private Capital Management (PCM), and says it favors the deal (why not, it is priced at a 26% premium to the day before Tony Ridder’s worst nightmare began when the three largest shareholders said they wanted the group sold.)

When the Ridder and Knight newspapers merged in 1974 they opted to list their shares on the New York Stock Exchange. Big mistake because the NYSE only allows one class of shares. If they had listed on the American exchange there could have been two classes of shares and the Knight and Ridder families would have been protected by controlling the voting shares. But don’t cry too much for Tony Ridder – his severance will be three years of salary plus various share options – he will walk away with about $8.5 million plus he holds stock worth another $13.5 million.

Wall Street is uninspired by the sale. The prices of Knight-Ridder and McClatchy have dropped since the announcement – McClatchy’s shares fell nearly 3% on the first day and K-R’s fell 1.7%. McClatchy is taking on some $3.75 billion in financing and hopes to make around $1.4 billion from selling the 12 newspapers. If it falls short of that number Pruitt’s board will not be happy, and one way to judge the sale is to see how much the two Philadelphia papers eventually go for. Less than $600 million and it’s a fire sale; more than $800 million and McClatchy will have done well.

The 20 newspapers McClatchy plans to hold onto provide around 60% of Knight-Ridder’s sales and circulation.

Pruitt met with the Miami Herald staff after its purchase was announced and told them, “Newspapers are not dead. They’ve got a great future. The newspaper is the last mass medium in each market.” But he also warned that a newspaper cannot exist as just a print publication. “We have to become a multiplatform 24/7 interactive company,” he warned.

One thing Pruitt won’t have to worry about is having PCM, Knight-Ridder’s largest shareholder, coming after McClatchy in the years ahead seeking a sale to enhance shareholder value. While PCM has McClatchy holdings, the McClatchy family, after the K-R purchase that included using shares as partial payment, will see their control of the company slip only from 93% to 83% -- plenty to ward off hungry predators.

Other major media families also set up two classes of shares when they went public so that the likes of a PCM forced sale could not happen to them. Only Knight-Ridder did not.

Something that Tony Ridder, as he thinks back to those early years prowling the hallways at 750 Ridder Park Drive in San Jose, must surely be wishing that someone had been smart enough to see 32 years into the future.