After Earnings Call, Analysts Speculate on KR Sale

By: Jennifer Saba Though Knight Ridder executives were mum on the potential sale of the company during Tuesday's earnings call, analysts speculated on the process in notes released yesterday.

Merrill Lynch analyst Lauren Rich Fine wrote that it's not unlikely bidders have come away from meetings thinking Knight Ridder's budget is "too aggressive," according to recent press reports. "Based on management's commentary on the call, we would concur," said a note.

Merrill Lynch thinks a deal will probably occur but the price will not exceed $70 per share. The firm also takes the view that just because several bidders are involved in the process doesn't mean they are driving up the price. "As bidders sensed a potential attractive take-out price, they joined the process," said the note.

Bear Stearns' Alexia Quadrani isn't so sure a sale is likely given Knight Ridder's "poor proforma operating results" in Q4. "[It's] a reminder to potential suitors that the fundamental newspaper advertising environment remains weak, and that the company's large market exposure, especially in Philadelphia and Kansas City, continue to be a significant drag on overall results," said a note.

Both research firms applauded Knight Ridder for a decent Q4 in regards to advertising revenues (down 0.2%) and for cost controls (150 buyouts in Philadelphia and San Jose) given all the noise surrounding the company since November's sale announcement. In addition, the company's online revenues continue to soar. Ad revenues at Knight Ridder Digital increased 55% in Q4 to $45.5 million.

And yet, Knight Ridder's forecast for 2006 calling for a 3% to 4% increase in ad revenues is worrisome because it's based mostly on easy comparisons, both research firms said. "While a return to growth would certainly be welcomed," said Bear Stearns, "we are not convinced that newspapers in general will regain traction from advertisers."

Bear Stearns is concerned that Knight Ridder will have problems raising ad rates over the year. Executives said they expect rates to rise 3% to 4% (after a flat 2005). "We worry this might be hard to achieve seeing the ongoing circulation declines," said the note.

In Q4, daily copies were down 4.1% and Sunday dropped 4.3%, partially due to Knight Ridder's commitment to cutting other-paid circulation.

Retail remains an issue with Knight Ridder, though executives went over in great detail the department store category. Merrill Lynch believes the company is vulnerable -- and not just in Philadelphia -- to consolidation and the decision for department stores like Federated/May to pull back advertising in newspapers and shift it towards TV and direct mail.

Knight Ridder executives attributed the classified automotive downturn, which has been a troublesome category to newspapers across the board, to a weak domestic auto market rather than a shift of ad spending to the Internet. Knight Ridder noted that auto dealer Internet spending represents only a small percentage of the total ad revenues. "We actually look at that low percentage as a risk, meaning newspapers have much more to lose," said Merrill Lynch. "We do sense part of the current weakness in auto classifieds stems from a shift to online."