Analysis: Complex Sale Suggests McClatchy Deals to Come

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By: Mark Fitzgerald

Industry observers were mildly surprised last month when The McClatchy Company included two solid northern California dailies, the Monterey Herald and Contra Costa Times, in the dozen Knight Ridder papers it put immediately back on the auction block.

McClatchy CEO Gary Pruitt told everyone who would listen that the papers made an attractive package with the San Jose Mercury News, a paper that might have been a harder sell as a standalone. The four-paper deal announced Monday evening proved his prescience: The package sold for an impressive multiple of 11.5 times 2005 EBITDA (earnings before interest, taxes, depreciation and amortization).

As Pruitt crowed in the announcement that was ?two full turns higher than the 9.5 times multiple we paid for the whole of Knight Ridder.?

The temptation is to say that this was the easy sale, low-hanging fruit compared to the remaining papers located in the slower growth markets that Pruitt says just aren?t McClatchy?s kind of towns.

But the addition of that fourth paper, the St. Paul Pioneer Press, in the purchase, and the side deals MediaNews Group has struck that ropes in three newspaper companies–Gannett Co., Hearst, and Stephens Media Group–could foreshadow some creative deal-making that will leave McClatchy sitting just as pretty as they are now.

Wednesday?s deal is exactly the kind of complex, swap-and-buy, three-way roundelay that these days MediaNews CEO William Dean Singleton, and, increasingly, Gannett, always seems to be right in the middle of.

Last summer?s Detroit newspaper swap involving Knight Ridder, Gannett and MediaNews–and including newspapers from Florida to Washington state–took the industry by surprise. Now, it looks like a template we?re likely to see frequently in the future.

MediaNews is widely reported to be in the hunt for The Philadelphia Inquirer and Philadelphia Daily News, two supposedly distressed properties that have attracted intense interest from local investors and the Newspaper Guild, which, backed by billionaire Ron Burkle?s Yucaipa Companies, has offered to buy for all dozen papers.

In his first public statement of the California and Minnesota purchases, Singleton pointedly said that those four papers were the ones ?that excited us most.? At the same time, he characterized St. Paul as a ?growing market? and he?s been spotted visiting the Philadelphia papers–just as he toured the Pioneer Press.

Odds are, Singleton is crafting a deal similar to Wednesday?s arrangement, which spreads his risk and allows him to do what partners such as Gannett and Stephens obviously think he does very well–manage newspapers in challenging markets.

With the addition of the four newspapers, Singleton noted, also pointedly, MediaNews will become the nation?s fourth-largest newspaper publisher in terms of circulation, with 53 dailies totaling about 2.7 million daily circulation.

But it will take quite a dance to get two of those new papers on board.

First, MediaNews will purchase the two northern California papers, the Mercury News and Contra Costa Times, while Hearst will acquire the nearby Monterey Herald, and the Pioneer Press.

In a separate agreement between Hearst and MediaNews, Hearst ?has agreed to contribute? the Herald and Pioneer Press ?in return for an equity investment in the non San Francisco Bay Area assets of MediaNews,? the announcement from the three chains said.

If that deal is tripped up by regulatory problems or is otherwise not consummated, the announcement said, MediaNews will buy the papers from Hearst.

MediaNews intends to do some ?contributing? of its own. It said it will contribute the Mercury News and Contra Costa paper to California Newspapers Partnership, in which MediaNews has a 54.23% stake. The two other partners–Gannett Co. and Stephens Media–have committed to contribute shares of the purchase price, MediaNews said., adding that it is funding its own share from bank borrowings, and has commitments from the Bank of America.

Certainly, Pruitt, who said there is ?intense? interest in the remaining eight papers, must be hoping creative buying can bring the kind of price the California papers and Pioneer Press package did.

“Individual newspapers and smaller groups of newspapers attract interest from buyers who wouldn’t be interested in a transaction as big as the whole of Knight Ridder,” Pruitt said in a statement. “To buyers whose strategy is a good fit, all of these papers represent outstanding opportunities that come around only rarely in our industry. Each will be valued on its individual merits and prospects, and we think all will bring full, fair prices.”

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