By: Jennifer Saba
While doubtful at first, the sale of Knight Ridder seems to be very real. The San Jose Mercury News reports that this week, Knight Ridder executives begin meeting with potential buyers, a process that will take about three weeks. A final decision by the board is at least two months away.
Since the possibility of a sale is growing stronger, the real question is how much Knight Ridder can fetch for its 32 daily newspapers and other properties. The price will determine, to some extent, a potential newspaper sector rally.
A report issued by Merrill Lynch today weighs the outcomes. “While having no way of knowing the likelihood of an eventual sale and or its structure of valuation, we believe the uncertainty created by the process will have the impact of bifurcating investment decisions on several companies, Gannett in particular.”
Merrill Lynch believes that shares of Gannett, and to a lesser extent McClatchy, will be impacted the most from a Knight Ridder sale. Both companies, along with several private equity players, have been mentioned as potential bidders.
If Gannett wins the spoils either as a sole buyer or the largest group buyer, the research firm expects that investors will meet the deal with a general negative reaction. Gannett will probably raise Knight Ridder’s operating margins quickly though. The report said that Gannett’s EBITDA margins for 2005 are estimated at 29% compared with Knight Ridder’s 20%.
If it turns out that Gannett is not going to get involved in the sale, Merrill Lynch predicts a rally of its shares.
There is little upside for McClatchy’s stock. If McClatchy takes Knight Ridder, investors will not respond especially since Knight Ridder’s markets in general have slower growth — which goes against McClatchy’s acquisition strategy.
If no sale of Knight Ridder takes place because the offers come in too low, it would put even more pressure on the industry at large. Conversely, a higher than expected take out price would spark a rebound in the sector, though Merrill Lynch thinks this outcome is doubtful. The report notes that Knight Ridder could go for as much as $70 per share — it’s currently trading around $64 a share.
On the takeout speculation, Merrill Lynch is still questioning why Tribune has not been more aggressive. “We believe there are several ways to surface value in Tribune shares, including the sale of non-strategic assets such as its 31% stake in the Food Network, the Chicago Cubs baseball team and perhaps even some newspapers,” the report said. “We continue to be surprised that management has not done more to surface value, given its poor stock price performance last year, and can’t help wonder if something is brewing.”
The research firm is concerned about Tribune’s 2006 performance, since the company’s steep circulation declines and direct mail issues at Newsday could make a 2% ad revenue growth target unlikely.
Meanwhile, for 2006 ad revenue growth for the industry, Merrill Lynch delivers some downcast news. “We keep coming back to the same conclusion that newspaper ad revenue growth in 2006 is likely to trail even the paltry estimated 2.4% in 2005.”
In the retail category, the Federated/May merger will continue to impact the segment this year. Classified advertising is expected to slow. Help-wanted advertising will continue to grow, but comparisons will be tough especially since GDP growth is expected to slow. Auto will continue to decline and real estate is expected to take some hits. National is forecasted to show some recovery.