Analysts Have Complicated Views of McClatchy Deal

By: Jennifer Saba For the most part, analysts are applauding McClatchy's move to purchase Knight Ridder. Given the company's history with mergers and acquisitions and chief executive Gary Pruitt's track record for growing revenue and circulation helps assuage any fears that McClatchy took on something too big.

And yet Merrill Lynch analyst Lauren Rich Fine wrote in a note released early this morning that if the research firm had its first choice it would prefer not to see McClatchy balloon in size especially when future growth is a big question mark: "However, McClatchy has historically been successful at integrating acquisitions and has certainly delivered on the top-line with relatively consistent ad revenue growth out-performance versus the industry such that returns have been decent."

While McClatchy has history on its side, analysts said that fundamentals of the industry are shifting. Prudential Equity Securities released a report noting that McClatchy did a great job integrating its last acquisition -- The Star Tribune in Minneapolis in 1997 -- yet the climate has changed and it might not be easy this go-around to improve margins.

Additionally, Prudential analyst Steven Barlow explained why the firm downgraded McClatchy to "underweight" yesterday on the news of the acquisition after receiving phone calls from investors. "At this point our call is for the next six months, which covers the time before closing and the first few months of integration." Taking the long view, Prudential likes the deal.

Both Prudential and Merrill Lynch believe McClatchy will have little trouble unloading the 12 properties -- including the Philadelphia Inquirer and San Jose Mercury News -- which according to Merrill Lynch represent $1.2 billion in revenues or 42% of Knight Ridder's overall revenues.

Fine wrote that the Newspaper Guild, Gannett, and MediaNews Group could be potential bidders for the properties on the block. She thinks there is some behind-the-scenes negations going on with MediaNews Group given the company's northern California newspapers. San Jose, Contra Costa, and Monterey could be good fit.

Fine estimates that McClatchy will fetch a takeout multiply of about 9 times, the low end of McClatchy's estimate of 9 to 9.5 times, for the 12 newspapers. Barlow is more skeptical. Prudential anticipates a multiple of 8 to 8.5 times EBITDA and expects McClatchy to get hit with a tax rate of about 39.5%.

"Assuming the deal closes, the biggest risk to McClatchy is a slower than anticipated revenue growth for all its properties," according to Prudential's report. "On the cost side of the equation, McClatchy hopes to see $60 million of savings. If the figure is not in the $80 million range over the first year, we think investors will be disappointed."

A special Knight Ridder shareholder meeting is expected in mid June. Prudential sees "little in the way of obstacles" for the deal to close.