Will Knight Finally Fall?

By: Jennifer Saba

Investors and analysts are keeping an eye on Knight Ridder as the potential sale of the company throws into question the value of newspapers ? and more to the point, who values them most. “Investors are on the edge of their seats waiting to see how this transaction works out,” says Peter Appert, a research analyst with Goldman Sachs. “If Knight Ridder trades at a premium, that would be positive for the whole sector. Likewise, if bids are disappointing, it will cement the view that industry prospects are declining.”

As E&P went to press, the first rounds of bids had commenced. After much speculation that few would come forward, a handful of private equity players, along with some newspaper companies like Gannett, had allegedly expressed interest in Knight Ridder.

Of course, Wall Street types aren’t the only ones assessing the situation? Knight Ridder employees are equally on the edge of their seats. The company will look very different depending on which group ? publishers or investors ? takes the spoils.

Under another newspaper company, the transition will not be as dramatic. “For the most part, the corporate structure at Knight Ridder would evaporate,” says Sammy Papert, CEO of Belden Associates, a newspaper research and consulting firm in Dallas. “There would be almost 100% redundancies.” In other aspects, however, any change will likely happen over a long period of time. “Another media company will be more apt to let things stay as they are, at least at first,” says Miles Groves, a media economist with MG Strategic Research.

No matter who does the buying, more cuts are likely on the way for Knight Ridder, even though the company started eliminating jobs this fall. According to Ken Doctor, a lead analyst with research firm Outsell in Burlingame, Calif., Knight Ridder was known for putting “above average” resources into its newsroom compared with its peers. Any buyer, he says, would bring those staffing numbers down to typical industry levels.

An even bigger question is, what happens if Knight Ridder is acquired by an investment group? Groves says, “I think the key difference is that a private equity player will be more focused on the bottom line costs and less focused on the journalistic values that drive many newspapers. It’s a thinner line now between Wall Street and newspaper companies.”

There’s little precedent in this area, at least for a large public newspaper company. The Blackstone Group and Providence Equity Partners, two firms reported to be interested in Knight Ridder, are part owners of Freedom Communications, but that private newspaper company is still family controlled.

Goldman’s Appert says historically, newspapers haven’t seen a lot of activity from private equity firms. “If, hypothetically, Knight Ridder is acquired by a group of financial investors, it will be quite dramatic ? the industry hasn’t seen a transaction on that scale,” he says. For guidance, Knight Ridder retained the investment banking side of Goldman, which is separate from Appert’s division.

Private equity investors are typically drawn to businesses with a lot of free cash flow, such as newspapers. So if KR goes to an investor group, they will most likely try to maximize that free cash flow, and attempt to figure out ways to make the business even more profitable. This would more than likely find them aggressively managing costs, trimming capital budgets, and possibly selling off certain assets, Appert says. Belden Associates’ Papert thinks it’s within the realm of possibility that a private-equity owner could chop a quarter to a third more of newsrooms’ staffs.

At the very least under private equity, people will have to justify their employment. “You will see more pressure on international and investigative journalism and more emphasis on local reporting,” Outsell’s Doctor says. As the axe falls, newsrooms will rely more heavily on wire copy to fill pages.

Private equity firms are awash in capital and actively invest in such various types of companies as Dunkin’ Donuts, he notes. “What is this Knight Ridder worth in terms of the value that it creates in the community?” asks Doctor. “I started wondering ? how are newspapers different from doughnuts?”

To private investors, there is likely little difference at all.

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