Goldman Sachs Analyzes Detroit Newspaper Swap

By: E&P Staff

Goldman Sachs’ analysis of yesterday’s big Detroit newspaper swap involving Knight Ridder, Gannett and MediaNews (along with trading/sales of smaller properties) concludes that taken together, ?these transactions appear to be earnings neutral? for KRI and Gannett for 2005.

?Longer-term,? it adds, ?we believe KRI traded volatility in Detroit for more stable growth in mid-market papers. As for GCI, by remaining in Detroit and having sole control, Detroit has the potential to incrementally add to EBITDA and earnings growth longer term. While these transactions are strategically interesting, they do not cause us to change our investment viewpoint on either name. Our ratings remain In-Line.?

Its more in-depth commentary includes the following:

Impact on Knight Ridder:

?Going forward, we believe the company traded upside potential, and downside risk, from a volatile Detroit ad market for more predictable and steadily growing small and mid-sized market revenues and earnings. ? The company exited what had been a difficult to manage Detroit situation with the potential to add, pending regulatory approval, two additional small-to-mid size market newspapers to its existing portfolio of newspaper assets. Although the JOA agreement in Detroit provided Knight Ridder with a 50/50 split of the profits, at the end of the day Knight Ridder did not have managing control as Gannett held a 3 to 2 board advantage. This resulted in conflicts between the two managements on how the papers should be run and, as a result, contributed to operational inefficiencies.?

Impact on Gannett:

?With the change in the ownership structure of the JOA, Gannett is free to implement changes it feels are necessary to drive operational improvements. Given Gannett’s track record of industry leading operating margins for its newspaper assets and an estimated JOA operating margins in the mid-to-upper teens, we see the potential for margins in the mid-to-upper 20’s. Such a scenario could add mid-to-upper $30 million to EBITDA. Exclusive of an economic recovery in the Detroit market, Gannett believes that these transactions exceed the company’s goal of low-to-mid teens return on investment.?

?Gannett’s acquisition of the Tallahassee paper aligns well with the company’s existing Florida presence. The company currently owns newspapers in Brevard County, Fort Myers, and Pensacola with an average daily circulation of 80K along with two television stations in Jacksonville and one TV station in Tampa-St. Petersburg.?

On the Detroit JOA:

?With a majority stake in the newly formed JOA with Media News Group, Gannett will now be required to include Detroit in its consolidated results. Given how Detroit was accounted for previously, this accounting change will have a negative impact on total company operating margins. We feel investors will focus on the potential for margin improvement going forward. The previous JOA had an expiration date of 2089. The renegotiated agreement between Gannett and Media New Group expires in 2025 and contains provisions for five-year incremental renewals thereafter. The near completion of the press project in Detroit, expected to be completed in the 4Q, appears to have been a catalyst to completing this transaction. The new press operations will provide increased functionality, operational efficiencies, and, ultimately, cost savings. Immediate examples of the increased functionality of the new press operations, in early 2006 the Detroit News will move to be a morning newspaper and compete directly with the Detroit Free Press, the two newspapers will move from publishing joint Saturday and Sunday editions to each publishing a separate Saturday edition and the Detroit Free Press will become the sole Sunday paper.?

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