Now That Knight-Ridder Is Officially For Sale, Two Questions Emerge: Who Would be Foolhardy Enough to Buy Newspapers These Days and Which Major Media Group Will Next Feel Shareholder Pressure To Sell Itself?

Philip M. Stone November 17, 2005

Knight-Ridder didn’t have much choice. With its three largest shareholders representing some 36% of the shares telling the company to explore ways of selling itself and threatening board changes if it didn’t, it hired Goldman Sachs to scout out the market.
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But it’s going to be a very tough sale.

It’s not that newspapers are not making decent money these days, the problem is that Wall street no longer sees newspapers as a growth industry – circulation is down, advertising is down, profits are down, and for many their share prices dropped some 20% this year although they have risen lately on the hope that if one group gets bought then maybe others, too.

And newspaper staff must be hoping against all hope that if there is a sale it will be to another newspaper group and not to private investors. If it’s private investors then the layoffs of the past two years will be nothing compared to what would come next. They’ll cut every ounce of extra fat out of the operation – expect to read a whole lot more wire copy – with the goal of making those newspapers lean mean machines in condition to be sold at a huge profit.

The last major newspaper chain purchase occurred earlier this year when Lee Enterprises bought Pulitzer for $1.46 billion, creating the US's fourth-largest newspaper publisher by number of US daily newspapers and seventh in circulation (with 58 daily newspapers in 23 states, a circulation of 1.7 million daily and 2 million on Sundays).

But although advertising revenues grew 74%, including the Pulitzer properties, Lee has announced a 30% drop in its third quarter profits compared to a year ago blaming costs involved in acquiring Pulitzer.

The two newspaper groups most frequently named to buy Knight-Ridder are Gannett and Tribune. But Tribune itself is ripe for a similar shareholder revolt that hit Knight-Ridder. Merrill Lynch has even published a critical report of Tribune, listing various Tribune sale scenarios for optimum revenue – selling its newspapers was the “best scenario” -- and criticizing the company for not being “more proactive in attempting to surface value.”  The company had a share buyback scheme in place but stopped it when its credit ratings were threatened.

Deutsche Bank Securities, on the other hand, recommended that Tribune sell its broadcast stations in order to fund the purchase of Knight-Ridder.

Tribune newspapers are still undergoing major problems. In Los Angeles, where in the past six months circulation has dropped another 3.5%, 85 further newsroom job cuts were ordered and the Outdoors section is being killed to save costs. In Baltimore, the Sun has announced it wants 75 job cuts. In Orlando, where the latest ABCs showed an 11% circulation drop at the Sentinel, staffers have been told in a memo that an unspecified number of job cuts are coming.

A languishing share price even has Rupert Murdoch concerned. At a shareholder meeting in Australia last week Murdoch said in reply to a question, “We do recognize the share price at the moment is rotten.” News Corporation shares are 16% below their 12-month high. He ruled himself out of any Knight-Ridder purchase – he still has his $2 billion war chest aimed at further Internet purchases.

Knight-Ridder found itself under pressure in early November when its largest shareholder, Private Capital Management with 19% of the company’s shares, got fed up with seeing various tactics like share buy backs fail to raise the price of the shares – in fact they had dropped 20% this year. PCM has some $4 billion invested in major US newspaper groups, including Tribune, but its letter to Knight-Ridder was the first public indication that its patience was wearing thin. Soon afterwards the second and third largest shareholders, also investment groups with a total of 17% of the shares, also wrote to Knight-Ridder urging a sale.

Tony Ridder, Knight-Ridder ceo, told staff in a memo there is no guarantee the company would be sold. “There is a wide range of possible outcomes, which include the sale of Knight-Ridder, restructuring the company or engaging in some other form of transaction or maintaining the company in its current form.”

The Knight-Ridder board said it would not provide any further information until an actual deal of some sort was done.

Meanwhile, the job of cutting costs goes on. At its flagship San Jose Mercury-News that announced in October it wanted a reduction of 45 in the newsroom, a total of 52 employees – 16% of the newsroom – have opted to take buyouts, thus eliminating the need for layoffs. The newsroom shrinks from 332 to 280, The company is also killing its Spanish language publication, Nuevo Mundo, and selling its Vietnamese language newspaper Viet Mercury.

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It’s No Longer Business As Usual at Knight Ridder – November 30, 2005

Since Knight-Ridder put itself into play for a possible sale, it’s no longer business as usual at the 32-newspaper company.

Moody Investors Service has made the cost of borrowing money more expensive by downgrading Knight Ridder’s senior unsecured debt ratings to Baa1 from A3 – about three levels above junk ratings – and has warned of a possible downgrade of its P-2 commercial paper rating. Wall Street believes one option Knight Ridder might consider is borrowing a great deal of money to fund more aggressive share repurchases or to make debt-financed sales.

The company has canceled corporate training meetings and has asked some senior publishers nearing retirement to stay at their posts. That in turn has frozen some transfers and promotions throughout the company.

Individual publishers are also telling their staff that all spending not necessary for daily operations is on hold.

In Philadelphia, union contract negotiations were suspended “given the uncertainty that exists while the Knight Ridder board considers strategic options, including a possible sale, “ publisher Joe Natoli said in a memo.

Even the company’s program of subsidizing the cost of hiring minority interns and awarding scholarships in its Minority Scholars Program has stopped.