McClatchy’s Shares Fell 20% in the 3 Months It Took From Announcing Its Knight-Ridder Purchase Until The Deal Was Done. “The Whole Industry Is Shaking; It’s A Difficult Time. I Hope They Prevail,” Said One Major Shareholder At The K-R Wake

Philip M. Stone June 29, 2006

At the end of the day McClatchy’s purchase of Knight-Ridder, already considered a cheap deal at $6.1 billion including debt assumption when it was announced March 13 actually was completed this week for $400 million less. McClatchy is paying partly with stock and its shares have crashed 20% in value since the deal was announced. So, why are newspaper companies still being slammed?

Listen to newspaper publishers and things are really turning around. They really have gotten the message that they must be a multiplatform business, that they must incorporate their print editorial and advertising departments with their Internet counterparts, that advertisers must be offered print and online packages to reach the even higher readership newspapers now have when combining their Internet unique visitors with print circulation.

And they say that while the Internet now makes up only about 6% of total revenue, within three years that should double to around 12%. All in all, what could be more positive?

But investors just are not buying it, at least not in the short-run and that divide between publishers and investors was most pronounced last week when the Newspaper Association of America (NAA) hosted its annual conference for newspaper investors. For publishers are talking beyond 2009 for when Internet revenues are really going to be significant and it won’t be until at least 2011 that they equal around 25% of total revenues, so what’s the upside of holding newspaper stock today?

That’s why Jean Batten, the widow of James Batten, former CEO of Knight-Ridder said in San Jose this week at Knight-Ridder’s final company meeting, “The whole industry is shaking; it’s a difficult time. I hope they prevail.”

The problem for newspapers is that Internet advertising is sold at a much lower price than print advertising. Print is losing circulation, it is just about able to maintain t advertising revenues but costs continue to rise, especially newsprint, and those new additional Internet revenues right now are not making up the difference. Those traditional 20% margins are getting harder and harder to sustain.

What is happening at USA Today, the US’ largest circulation newspaper,  is a good example as any. On the Internet side revenues are up about 16% this year. But on print, advertising was down in Q1 but it is bouncing back somewhat in Q2. But now an additional problem is arising.

Advertisers are increasingly not sure where they are getting best value for the dollars, so they are leaving it very late to make their ad bookings. This is not only happening with newspapers, but at the television upfronts that recently concluded many advertisers waited until the last minute to make their decisions and some large companies like Johnston and Johnson actually did not participate, preferring to hit the scatter market even if it that is more expensive. So making revenue forecasts is not so simple any more

At the newspaper convention publishers appeared quite smug that they were going to tell the investors what they wanted to hear and were somewhat taken aback when they didn’t get the reception they expected. The investors basically told them it was all taking far too long for their liking. The publishers wanted to talk about 2008 and beyond; the financial people wanted to discuss today, tomorrow, and next year,

Finally the question on most analysts’ minds finally popped out: “When will your online revenue equal 25% of your total revenue”?

Doing the math, if online revenues continue to grow by about 35% annually, and print revenue stays about flat then online reaches about 25% of total revenues by 2011. That’s five years down the road and that’s why Wall Street continues to sell newspaper shares. They can do a lot better for their money elsewhere in the intervening years, and when it looks like online revenues are beginning to become a real factor for newspapers they can always return to the industry.

And can that 35% annual growth be maintained. Donald Graham at the Washington Post doesn’t think so. USA Today is seeing only 16% -- and at the New York Times it is 25%.

So when Tribune’s Dennis FiizSimons said Internet revenues are up 28% this year and now made up 6% of his group’s revenues and he expected that to double within three years and Graham of the Washington Post said online advertising was increasing by about 35% annually those numbers did not particularly impress the financial audience because 35% of very little is still very little.

It’s all in the eye of the beholder. One beholder definitely worth listening to is Rupert Murdoch who has invested some $2 billion in Internet enterprises in the past year while continuing to strengthen his newspaper properties via better online sites and huge investments in new color presses. In an interview with Wired.com Murdoch gives his view of the newspaper industry today vis a vis online revenues:

“Can newspapers make money online? Sure. Can they make enough to replace what’s going out? At the moment, with the Internet so competitive, so new, and so cheap, the answer is no. But don’t look at it as a newspaper – look at it as a journalistic enterprise. If you’ve got authority and trust, if you can make the news interesting, you’ll survive.”

But is that really good enough for Wall Street these days?

ftm Follow Up & Comments