It’s Looking Like Gannett Would Prefer Buying British, But It Could Still Get Involved in The Knight-Ridder Sale

Gannett already owns the Newsquest newspapers, the second largest UK regional group with some 300 titles of which 17 are daily including the Glasgow Herald. With the UK’s regional advertising picture still somewhat in the dumps, the group did not have a great 2005, but Gannett still seems interested in expanding its UK presence.

Daily Mail and General Trust (DMGT) surprised the markets last November by putting Northcliffe Group up for sale at a price then expected to bring in around £1.5 billion. But softness in the classified ad market may lower that figure down to around £1.2 - £1.3 billion unless a bidding war ensues. Northcliffe publishes 20 paid evening titles, 28-paid-for weeklies, and more than 50 free weeklies.

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The decision by the Daily Mail and General Trust (DMGT) to put its Northcliffe regional group of 112 titles up for sale is for exactly the opposite reason why Knight-Ridder in the US is looking to sell itself.

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The group would make a neat fit into Newquest, but Gannett does not have the running all to itself. Private equity firms such as Capital Partners (Goldman Sachs) Candover, CVC, and Providence are showing big interest with various partnerships being formed, although one private equity firm pulled out last week concerned over Northcliffe’s £100 million pension liabilities. Northcliffe earned £102 million in 2005.

Gannett is thought to have the edge because it would be willing to buy all the newspapers outright and then dispose of what it doesn’t want, whereas the equity houses are more interested in picking and choosing what they buy.

According to the San Jose Mercury News, the K-R newspaper in the company’s hometown and thought to be as up on what is going on inside the company as any source could be, Gannett canceled two days of meetings with K-R scheduled for last week and is said to be in discussions with MediaNews, a privately held Denver-based newspaper group about some sort of alliance.

The San Jose newspaper says it is unclear whether the two are looking at a joint bid, or if they have a plan to split the K-R empire if there is a successful bid. Gannett, for instance, would not want K-R newspapers located in cities where it already has TV stations such as St. Paul, Minnesota, Camden, New Jersey, and Macon, Georgia.

Gannett and MediaNews have worked together before and there could be strategic and financial benefits to both companies in working on this deal together, too.

What worries DMGT, however, is if the K-R deal goes forward before the Northcliffe deal, will Gannett retain its British appetite. DMGT is set to make a final decision by the end of February which is thought to be before there will be any K-R decisions.

K-R meanwhile announced that while revenue grew slightly in the fourth quarter of 2005, net income plunged 22% to$83.3 million from $107.2 million for the same quarter a year before. But the results from a year ago included 13 cents a share from newspapers that have now been sold which means that operations were basically on par from the year ago which pretty much pleased financial analysts.

The group saw gains of 2.3% in circulation revenue and 3% in advertising revenue, but that was all offset by a 6% increase in costs, some of that attributable to the possible sale.

There had been reports that possible buyers had questioned the rosy outlook for 2006 that K-R had projected in its sale information book. But the Q4 results indicated that K-R did have a good quarter, and it projects that the second half of 2006 will be even stronger.

Were private equity groups rather than newspapers the prime winners in any auction, they would want to cut costs dramatically to prepare the newspapers for further sale. K-R is said to be telling potential suitors they could probably save $150 million a year by reducing the workforce by 5%, cutting labor costs and reducing corporate overhead.

But unless a potential buyer can show it will continue K-R’s “journalistic excellence” a buyer may need to win 80% of shareholder votes to win the company. If the board believes the buyer will maintain standards then it needs just two-thirds approval by the shareholders. An independent panel of experts would grade the potential buyer.

But with some 90% of Knight-Ridder’s shares in institutional hands whether 66 2/3 or 80% approval is necessary could be irrelevant if the price is right.