In Just Two Months, McClatchy’s Dumping Of 12 Poorly Performing Knight Ridder Newspapers Is Showing Itself To Have Been Very Smart. Four of Those Newspapers Are Already In Serious Trouble

It was a big gamble for McClatchy – would they be able to sell those 12 newspapers at a respectable price or would they be stuck with newspapers it really didn’t believe would perform well, given their markets. They did indeed pull it off and now two months later that strategy is already proving to have been right on target.

Four newspapers, The San Jose Mercury News, The Contra Costa Times, The Philadelphia Inquirer and the Philadelphia Daily News, are already experiencing severe financial problems with their new owners saying they have no choice but to make severe staff reductions.

The Mercury News says it may fire up to 101 staff over the next two months because of a severe drop in advertising revenues. The newspaper is looking at straight layoffs, not buyouts, and that includes about 41 newsroom staff – 15% of the editorial operation. Deadline for all to go is December 19 – shades of Mr. Scrooge!

At the Contra Costa Times, one day the editor was there and the next day he was gone. Many job functions have been consolidated.

The Media News Group, headed by William Dean Singleton bought the San Jose and Contra Costa newspapers to consolidate its hold as the largest newspaper publisher in the San Francisco Bay Area with some 700,000 total subscribers. With that scale the idea was to consolidate functions as much as possible between all the newspapers to make them all more economically viable. So, for example, having an editor in Contra Costa was seen as not necessary any more. But it hasn’t all gone to script and the villain is the severe drop in advertising.

A Mercury News spokesman said it was all a matter of economics and it was necessary to sever about 9% of the San Jose newspaper’s total workforce of 1,163. A year ago at least 50 journalists accepted buyouts so with 41 set to go now it means the newsroom is being decimated by a near 30% cull within a 14-month period.

The Newspaper Guild, currently in negotiation with Singleton, makes noises about journalism quality that will cause circulation losses, but that falls mainly on deaf management ears. Newspapers are supposed to make 20% plus profits and whatever has to be done to continue those numbers are gong to be done with the hope the readership won’t notice that some of their favourite bylines may have disappeared.

ftm background

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
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?

Dean Singleton Is Paying McClatchy Around 12 Times Cash Flow To Buy His Four Knight-Ridder Newspapers So No Wonder He Is Green With Envy When He Sees The Tribune Company Buying Up 25% Of Its Stock for About 8 Times Earnings!
Gary Pruitt, McClatchy CEO, and Dean Singleton, CEO of the privately held MediaNews Group, were participating in a panel discussion a few weeks ago when the conversation got around to newspaper evaluations. This was at a time that McClatchy had made its deal for Knight-Ridder and was now trying to offload 12 newspapers it didn’t want.

Gary Pruitt Says It Would Have Been Inconceivable A Few Years Ago To Have Bought Knight-Ridder For Such A Low Price. Wall Street Says McClatchy Would Have Done Better Buying Its Own Shares and Calls The Newspaper Industry “A Stinker”
Gary Pruitt is fond of telling people that he made a great financial deal in buying Knight-Ridder’s 32 newspapers for “only” $6.3 billion including debt assumption – such a low price would not have been possible just a few years ago when newspapers were in favor with Wall Street. But Wall Street has its final say – the money would have been better spent on McClatchy buying its own shares.

A High Price For Knight-Ridder Sale Would Have Signaled A Bright Future For Newspaper Valuations, But McClatchy Paid Practically No Premium And Yet In The Intervening Weeks Its Shares Have Dropped 12% To A Four-Year Low. What Does That Tell You?
Most observers seemed to think that McClatchy did OK. It bought Knight-Ridder for $4.5 billion representing a dollar or two a share over its stock market price, and then said it was only keeping the 20 newspapers that showed real growth and it was dumping the rest, and that sale, after tax, would reduce the total transaction to around $3 billion.

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?
That someone, it happened to be McClatchy, paid about $67.25 a share for Knight-Ridder -- some $4.5 billion plus absorbing K-R’s $2 billion of debt -- was about what the markets expected. But where was Gannett and all those private equity companies that were expected to put in bids? The word is they dropped out, which gives as good an indication as any that newspaper valuations are not what they used to be.

Singleton is known for running very tight ships – although his spin after buying the newspapers from McClatchy was that nothing disastrous was going to happen at either newspaper. But Mercury News publisher George Riggs said back in August that newspapers had to become “super, super sufficient” with their costs. In a staff memo outlining what has to happen now he wrote that they had to understand the seriousness of the problem – it was down to ensuring the future viability of the newspaper.

While Singleton believes the way forward for newspapers is via their web activities, it will take several years before the necessary revenue from the web will replace what print is now losing, and with print advertising not showing any signs of improvement the truth is there may well be more cuts to come.

On the opposite coast, in Philadelphia, things are, if anything, even bleaker, a severe contrast to last August when a group of local entrepreneurs bought the newspaper, promising investment and that the good times would roll.

But less than two months later publisher and lead investor Brian Tierney has written to staff that the situation is becoming very dire, and if actions are not done immediately to cut costs – because of a severe decline in advertising – then it is possible the newspapers may not be able to service their bank loans next year.

“We are in a very difficult position,” He wrote. He cited significant falls in advertising since last year (September was down 10.2%) and that October and November will probably end up seeing the largest two-month revenue drop in the newspapers’ history.

Tierney pointed out that other publishers have said the past quarter has been extremely difficult, especially September, and that is borne out in many third quarter reports issued by media companies.

Tierney said in 2004 The Inquirer and Daily News provided Knight Ridder with $100 million cash flow; In 2005 it fell to $76 million, this year it is projected at $50 million but because of servicing bank loans it falls to just $10 million.

“Simply put, this dramatic revenue decline will prevent us from meeting our bank obligations if we don’t take absolutely critical actions on the cost side of the business,” he said.

The bottom line in the letter: We need to significantly restructure our labour contracts and our workforce …We must reduce our workforce so that it is in line with our reduced revenue. To the extent we don’t get the savings, those layoffs will be larger.

But negotiations to cut costs are in trouble. Only four of 12 unions have struck tentative agreements and in a sure sign that there is little progress a federal mediator has been brought in. Contracts expire at the end of this month.

Management has proposed that the two newspapers merge newsrooms – a proposal that hasn’t been well received since many believe that could be the first step in trying to kill off one of the newspapers.

Tierney along with other millionaire investors paid $562 million for the newspapers.

Meanwhile, back in Sacramento, California – McClatchy headquarters -- CEO Gary Pruitt must be looking at all of this with two distinct feelings – sadness that those newspapers are having so much trouble this early on in their new life, and with great satisfaction that he and his senior management team made the right decision to keep just the fittest newspapers and dump the rest and those problems are not his.

In McClatchy’s third quarter earnings report, had the company owned a year ago those 20 Knight Ridder newspapers it kept, then for comparison with this quarter’s results revenues would have been down 1.4%, advertising revenue would have been down 0.8% and circulation revenue down 4.2%.

Maybe not great sounding growth numbers, but given the state of the US newspaper industry these days, they’re better than most.

The State of the Print Media in the World New! October 2006

In Just Two Months, McClatchy’s Dumping Of 12 Poorly Performing Knight Ridder Newspapers Is Showing Itself To Have Been Very Smart. Four of Those Newspapers Are Already In Serious Trouble

The State of the Print Media in the World
New! October 2006