Analysts Give Thumbs Up to Pulitzer Deal, Stay Cautious on Lee Stock

By: Jennifer Saba Here's how Lee Enterprises' $1.46 billion acquisition of Pulitzer Inc. was greeted by the investment community: The deal was fair; it was a good strategic move; and Lee's stock will probably suffer in the short term.

And with that came the ratings. Merrill Lynch, Deutsche Bank, and Prudential Securities all stamped a yellow light on Lee's stock, with "neutral," "hold," and "underweight" ratings respectively.

The biggest challenge for Lee will be wresting as much upside from the Pulitzer deal as it did from its 2002 purchase of Howard Publications. The Pulitzer transaction is roughly 2.5 times the size of the Howard buy. The investment firms noted that Lee's purchase of Howard was "top notch," as Deutsche Bank put it, because Lee quickly raised both revenue and circulation margins. However the upshot with Pulitzer is going to be harder to come by.

Merrill Lynch said in its report that Pulitzer was already adapting Lee's strategy of concentrating on local market share. Pulitzer was also adept at managing costs. "Further, Pulitzer's PNI properties have outperformed the industry from a top-line perspective for the past two years, seemingly creating less upside potential at those properties," the report said.

Both Merrill Lynch and Deutsche Bank harbor a bit of skepticism that Lee can handle St. Louis, now Lee's largest market. (The St. Louis properties generate 45% of Lee's old revenue base and roughly 27 to 28% of the new revenue base, according to Merrill Lynch.) And it's not because of management -- it's agreed that CEO Mary Junck has the chops to run a larger metropolitan paper.

But Lee's strategy is to "dominate" the local ad market, and the company claims it captures half of the ad dollars in its markets. Yet, "larger markets are typically much more competitive markets, thus Lee will hope to capture far less than 50% of the market in St. Louis," Deutsche Bank said.

Even so, the firms smile on the deal: ?We believe this is a good geographic and cultural fit for Lee,? Deutsche Bank said.

Merrill Lynch and Deutsche Bank both lowered their earnings-per-share estimate for 2005, as Lee has said that transaction would dilute earnings for the year by roughly $.10. Merrill Lynch dropped its projection to $1.95 per share from $2.05 per share. Deutsche Bank lowered its outlook to $2.02 per share from $2.10 per share. Prudential Securities was more aggressive than management's guidance and lowered its EPS estimate to $2.05 from $2.10.


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