Bear Stearns Puts Odds on KR Sale at 60%

By: Jennifer Saba There's a 60% chance that a Knight Ridder sale will go down, predicts a report released today by Bear Stearns analyst Alexia Quadrani.

The calculation is based partly because Bear Stearns does not believe suitors would pay much more than the current stock price -- Knight Ridder is trading at roughly $62 a share -- and that shareholders would want a transaction that would fetch more than $65 a share.

In the report, the research firm looks at several potential outcomes regarding the auction, including the probability the company won't be sold at all.

In terms of strategic buyers that have emerged in the process -- Gannett, MediaNews Group, and McClatchy -- only Gannett has the financial heft to make a deal on its own. There are some large caveats for Gannett, said the report, including Knight Ridder's big markets like Philadelphia, San Jose, and Kansas City, which are dragging down results. Gannett tends to invest in small to medium-sized markets.

Knight Ridder has indicated that it does not want to sell off the company in pieces.

As Bear Stearns mentioned in a report last week, Gannett's interest in Knight Ridder may hinge on the Northcliffe newspaper properties, which are on the block in the United Kingdom. If Gannett successfully wins that bid, it will probably drop any intentions for Knight Ridder, said the report.

Private equity players would be most interested in the company, but likely below $70 a share. Also a sticking point: CareerBuilder. The online recruitment site is considered a highly attractive piece of Knight Ridder's portfolio. However, since Tribune and Gannett jointly own CareerBuilder with Knight Ridder, Bear Stearns speculates they have first right of refusal in the event of an ownership change.

If Knight Ridder is not sold, "activist shareholders would probably demand some form of enhanced returns," said the report. That could come in the form of a massive buyback -- Bear Stearns floats out a program that involves about 30% of outstanding shares -- and a big dividend.

If Knight Ridder rejects any offers because they were deemed too low it should institute a buyback program immediately, said the report. A gap between announcements could send shares south, trading at $50 to $55.