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”

Philip M. Stone May 29, 2006

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.
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McClatchy CEO Gary Pruitt

Pruitt says McClatchy is on target in selling the 12 newspapers its doesn’t want and will probably exceed the $2 billion before tax it had forecast for those newspapers. So it ends up with 20 newspapers in high-growth markets for about $4 billion plus and Wall Street still doesn’t think that’s a great deal! Have the prospects for the industry sunk to such a low?

According to Merrill Lynch’s Lauren Rich Fine, considered one of the most respected Wall Street media analysts, the answer is “Yes”. She claims McClatchy could have gotten the same growth return if it had spent that money on buying its own shares instead of Knight-Ridder.

That doesn’t say very much for investing in the newspaper business, and Fine admits that as much as she has believed in newspapers as a thriving business in the past it may well be that those days are done.

In her most recent report she said, “We are now concluding that the fundamental outlook for newspapers is even more challenging than we had previously thought; in essence profits generated from an almost monopolistic position within classifieds is being eliminated as the core listings business (for newspapers) could become a loss leader for other online classified models.”

She estimates that print classified advertising is about 70% of what it should be today if online classifieds had not stolen newspapers’ thunder, and since 2003  newspapers have been losing some 5% of their classified revenues annually. Not only that  but newspapers are shooting themselves in the foot during these highly competitive times by charging too much for their print classifieds.

She also believes that the falling circulation is leading directly to less advertising revenues.

And she predicts that the usual 20% newspaper margins now belong to history and that within the next five years margins  will drop to 16%. The main question, of course, is how much can print earn online to makeup for continuing declines from the print product itself.

Whereas the Internet is forecasting advertising growth of 25-30% for each of the next several years, Merrill Lynch believes that newspaper ad revenue growth will be only about 1.6% for the next five years, a reduction from the 2% previously forecast.

On the other hand Merrill Lynch earlier in the month increased its forecast for this year’s online ad revenue growth to 28.7% from the previous estimate of 27.5% and that the total online US spend will be about $16,15 billion, some 5.5% of the total US ad spend. The main reason for the increase was because of increased Google search revenues.

Not helping the view on newspapers was the New York Times Company report that April advertising revenue dropped 1.6% compared to April, 2005 with total revenue about flat. At its New England Media Group, headed by the Boston Globe, ad revenue was down an almost unbelievable 13.3% in the same period comparison.

Even MediaNews, Dean Singleton’s group that is buying  four Knight-Ridder newspapers from McClatchy for around $1 billion, announced a first quarter loss of $3.6 million.

McClatchy has not had an easy ride on Wall Street since it won the Knight-Ridder bidding  on March 13. Its shares have dropped around 12% and a first-quarter 14% decline in profits didn’t help.

Pruitt, however, continues the positive spin. He told this month’s annual meeting of McClatchy shareholders that newspapers were holding onto their audiences better than other traditional media, and when a newspaper’s web audience is added into the equation then newspaper readership is actually increasing.

But Lauren Rich Fine who has been around newspapers for quite a while now plotting their successes and failures says she is no longer convinced. While management skill and cash flow are still “distinguishing features” when it comes right down to it she believes newspapers are in serious decline.

Her view: “We still think it is a stinker of an industry”

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Jury Still Out On The Knight-Ridder Purchase - October 18, 2006

McClatchy has issued its first quarterly earnings report since it digested the 20 Knight-Ridder properties it kept. And how has it done? Assuming that McClatchy had owned the KR newspapers for the same reporting period last year then a like-on-like comparison would show revenues down 1.4%, with advertising revenues down 0.8%  and circulation revenues down 4.2%.

The addition of the KR newspapers this 3rd quarter saw the company earn $51.8 million, up from $38.6 million a year ago, but per share earnings were down to 64 cents from 82 cents a year ago because the company had issued new shares to help finance buying Knight Ridder. Revenues for the combined company more than doubled to $680.9 million from $292.6.

McClatchy CEO Gary Pruitt says the integration of the 20 Knight Ridder newspapers with the 12 that McClatchy already owned was going better than expected, despite a "lousy operating environment." He said the advertising environment continues to look weak and with all available cash and some of its credit facility being used by the end of the year to pay a big tax bill, so it looks like cost-cutting will remain the name of the game.

McClatchy’s junk debt is currently $2.5 billion but it will increase to $3.3 billion in order to pay the tax bill.