Stirring the Pot

By: Mark Fitzgerald

Here’s how it’s supposed to happen: One fine summer day, the McClatchy Co. will close on its $6.5 billion March 2006 bet on the newspaper industry, absorbing 20 daily newspapers, a score of Web sites, and a stake in the jobs network. It also will set aside a tidy sum to pay taxes on a dozen daily papers ranging in size and health from The Philadelphia Inquirer to the Aberdeen (S.D.) American News, that its brokers have sold off in the meantime.

The target is July. McClatchy says it’ll be the first day of the month. But for the dozen papers cast out by both Knight Ridder and McClatchy, it could be a symbolic passing: July 4, Independence Day.

Or, the whole thing could become more complicated and close on the more ambiguous July 14, Bastille Day, symbol of a revolution that went tragically wrong.

One date is sure: The March 13 announcement of the Knight Ridder deal came precisely six years after the industry’s biggest blockbuster, Tribune Co.’s $8 billion acquisition of Times Mirror Co. It looked brilliant at the time, but now has the chain struggling with the Los Angeles Times’ lagging performance, cross-ownership problems, and circulation scandals at former Times Mirror papers Newsday and Hoy.

There’s a hint in the latest purchase deal that much can happen between now and the summer: If the sale isn’t consummated, McClatchy receives a $171.9 million termination fee from Knight Ridder. And Wall Street, in the days after the announcement, showed some skepticism, pushing the price of both companies’ stock down modestly.

But when it comes time for shareholders to actually vote on the deal in June, it’s likely to be approved. Says industry veteran John Morton: “It’s a very good deal to buy the whole company. If you take out those [12] properties, everything looks pretty good.”

And what choice do Knight Ridder stockholders have, asks Ed Atorino, managing director at Benchmark Co. “If they say no, the stock will go down to $55,” he says, noting the deal was valued at $67.25 per share at its announcement. McClatchy, he adds, “is not some fly-by-night private equity group that will destroy the papers.”

But what of those 12 dailies up for sale? Newspaper brokers are convinced they’ll find a home. Gregg Knowles, whose Knowles Media Brokerage Services specializes in California sales, says the three papers available in that state ? the KR flagship San Jose Mercury News, the Contra Costa Times, and The Monterey County Herald ? are in “great markets” and “buyer interest is high.”

The properties are so good that Thomas Russo, partner in Gardner Russo & Gardner, which owns a 6% stake in McClatchy, was at first surprised the chain wasn’t keeping them. Now he thinks it’s a good idea, noting that McClatchy took a “wise pass on San Jose,” and put the other two papers up for bid to establish an attractive package.

One possible buyer is William Dean Singleton, whose closely held MediaNews Group already owns several Bay area papers including the Marin Independent-Journal, The Oakland Tribune, The Daily Review in Hayward, The Argus in Fremont, and the San Mateo County Times.

There’s a similarly natural buyer for the Aberdeen, S.D., paper and the Grand Forks (N.D.) Herald, and perhaps even the Duluth (Minn.) News Tribune: the Marcil family’s Forum Communications, which in recent years has expanded into Plains and Minnesota markets well beyond their Fargo, N.D., flagship, The Forum.

What’s less clear is what effect the Knight Ridder deal ? blockbuster though it was ? may have on future newspaper valuations.

Talking to analysts the day the acquisition was announced, chairman/CEO Pruitt said he figured the dozen dailies he was re-selling would go for about the same multiple McClatchy paid for the entire chain. Newspaper broker Larry Grimes says when he heard that he had an immediate reaction: “If I were brokering that deal, I would hope to get considerably more than that for you, Gary.”

Merrill Lynch analyst Lauren Rich Fine noted in her initial report on the deal that its sale price is “well below historical LTM (last twelve months) transaction multiples” of 12 to 13 times EBITDA (earnings before interest, taxes, deductions, and amortization).

Certainly Pruitt wants to portray the deal’s valuation as, if not exactly a fire-sale price, a good deal for McClatchy. Knight Ridder, by McClatchy’s calculations, sold for 9.5 times EBITDA, and Pruitt was quick to contrast that to the 13 times EBITDA that Lee Enterprises paid almost exactly a year before for Pulitzer Inc., the last newspaper industry example of a minnow swallowing a whale. Pruitt even said the Knight Ridder multiple could be pushed down even more ? to 8.7 times ? when an expected $60 million in “synergy” savings is considered.

But brokers and mergers-and-acquisitions firms remain not only undisturbed by the multiple, they think the giant deal might kick up some new business for them. (None of the brokers quoted in this story represent McClatchy or Knight Ridder.)

“The brokers I’ve been talking to say, ‘Hey, maybe this will shake things loose because a lot of [newspaper owners] have been sitting on their hands,'” says Michael D. Lindsey, president of Cheyenne, Wyo.-based Media Consultants Inc. “People, I think, are feeling a little nervous that maybe they’ve missed the bubble.” The deal itself has “sort of invigorated the whole atmosphere,” says Dick Briggs, principal of Richard Briggs & Assoc. in Landrum, S.C.

Newspaper brokers say this is a paradoxical market for newspapers: Demand far outstrips supply for dailies and good-market weeklies, but buyers are also very exacting about what they want. By contrast, in recent previous industry good times, such as the 1998-2000 period, buyers would take just about anything on the market, says John T. Cribb, president of Cribb & Associates in Bozeman, Mont.: “Buyers will pay full price if it’s exactly what they want. If it’s not exactly what they want, they may not buy it at all.”

Rickenbacher Media Co. President Ted Rickenbacher says for the past 15 years, mega-deals like the Knight Ridder sale have had a trickle-down effect on community papers, where the market is strongest. This one, he adds, is likely to have the same effect.

Smaller dailies in the 15,000- to 30,000-circulation range are going for 10 to 14 times EBITDA, brokers say, while good weeklies ? following the rule of the lower the cash flow, the lower the multiple ? are going strong at 7 to 9 times.

Brokers uniformly think the 12 new McClatchy papers up for sale, will fetch higher multiples than the entire chain. Even the Inquirer and its sibling tabloid Philadelphia Daily News ? which have been described by many as “troubled” ? will sell at a good multiple, predicts Larry Grimes, president of W.B. Grimes & Co. in Gaithersburg, Md.: “There are plenty of buyers out there, buyers with deep pockets backed by big financial organizations ? and they are absolutely looking.”

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