Biggest Deal Yet p.17

By: GEORGE GARNEAU KNIGHT-RIDDER INC. has seen the future, and it's all about newspapers.
In the biggest all-newspaper deal on record, the nation's second-largest newspaper company has agreed to spend $1.65 billion to
buy the Kansas City (Mo.) Star, Fort Worth Star-Telegram and two smaller papers from Walt Disney Co., which acquired them in the 1995 takeover of Capital Cities/ABC Inc.
The tax-free transaction, expected to close within 60 days, calls for Knight-Ridder to issue Disney $660 million in convertible preferred stock and to assume $990 million in debt.
At the same time, Knight-Ridder announced plans to sell its electronic information service, Knight-Ridder Information (KRI), which analysts valued at $500 million, closing the books on the company's 1980s-era diversification strategy. Proceeds would pay down debt. The company already has sold holdings in broadcast TV, cable TV, its business news wire and shipping newspaper ? leaving Knight-Ridder looking like its former self in terms of media mix: newspapers, just more of them.
Knight-Ridder chairman and CEO Tony Ridder said he would keep KRI if not for the acquisition. The company was reinvesting in the unit ? with 1,000 employees and nearly $300 million revenues ? in an effort to restore its declining market share.
At a time when newspapers conjure the image of a smokestack business in the information age, the investment was seen as a vote of confidence in the future of newspapers, especially after Knight-Ridder's $360 million purchase of the Lesher papers in California in 1995.
The deal ? the biggest all-newspaper transaction ever ? is half-again bigger than the New York Times Co.'s $1 billion purchase of the Boston Globe in 1993.
The sale includes the Star (circulation 291,000 daily, 424,000 Sunday), Star-Telegram (242,000 daily, 342,000 Sunday) Illinois' Belleville News-Democrat (51,000 daily, 62,000 Sunday) and Wilkes Barre, Pa., Times Leader (48,000 daily, 70,000 Sunday).
The papers brought in $500 million in revenues and $125 million in pretax profit last year, Knight-Ridder said, for a healthy operating profit margin of 25%.
Knight-Ridder reported overall 1996 revenues of $2.77 billion and operating profit of $335 million, a 12.1% margin. A spokesman said Knight-Ridder newspapers averaged 16% margins.
The transaction gives Knight-Ridder 35 dailies in 27 markets, and increases combined circulation by 630,000 daily, 898,000 Sunday, to a total of 4.3 million daily, 6.1 million Sunday ? not far behind Gannett Co.'s 92 dailies.
It also adds about 4,000 employees to a payroll of 20,000.
While the acquisition leaves Knight-Ridder more vulnerable to the economic downturns that periodically affect newspapers, it strengthens its position in major markets and adds geographic diversity, a cushion against regional economic cycles.
"They have two real gems with Kansas City and Fort Worth," said Kevin Lavalla, who handles newspaper transactions for the New York investment bank Veronis Suhler & Associates. "Those opportunities just don't come around often."
"They know what they do well and they obviously see growth potential and profit potential in newspapers," Lavalla said.
Knight-Ridder won the bidding for the papers ? reports said other potential buyers included Hearst, Hollinger, Times Mirror and Tribune ? from the group of eight general interest dailies and other publishing properties that Disney put up for sale in January.
The price was in line with the strong multiples of the past several years. It amounted to less than 11 times cash flow, and about 3.3 times revenues ? lower than some recent sales, higher than others, Ridder said.
The market position of the Star is more dominant than that of the Star- Telegram, which is facing new competition from the Dallas Morning News, but both papers are in fast-growing areas.
Saying growth prospects for the acquisitions were good, Ridder cited, for example, projections of 22% a year population growth in Fort Worth, where household incomes are 15% over the national average.
Overall, the papers being acquired increased their revenues an average of 7% a year over the past four years, he said.
The two metros have more or less average household penetration, according to Cap/Cities publishing chief Phil Meek. He said the Star-Telegram reaches 41% of homes daily, 57% Sunday, in its core Tarrant County market, and the Star reaches 42% of homes daily, 61% Sunday, in its five-county market.
Knight-Ridder's moves put it on a somewhat different course. While Times Mirror has taken similar steps ? divesting most other media holdings to focus on newspapers ? Tribune and Gannett have exploited deregulation to expand broadcast TV holdings, and Dow Jones has decided to pump a small fortune, over $600 million, into its faltering financial information service rather than sell it.
While analysts spoke well of the transaction, Knight-Ridder's stock price slid 1.75 points on the New York Stock Exchange on April 7, the first day of trading after the deal was disclosed on Friday, April 4.
And Moody's Investors Services said it would review Knight-Ridder's credit ratings for possible downgrade.

Journalists Applaud
Financial ambivalence aside, people in newsrooms at the papers being acquired were upbeat about new owners with a renewed commitment to newspapers and tradition of strong support for journalism.
Their relief followed disappointment when Disney announced in January it intended to sell the papers ? less than a year after saying just the opposite ? and years of increasing irrelevance under each new owner, first when Cap Cities acquired ABC, and then when Disney gobbled up Cap Cities/ABC last year for a whopping $19 billion. Employees described a growing sense of benign neglect.
"In two runs here, I have worked for a maverick Texas millionaire family, a cable TV company, a TV network and a cartoon mouse, and I'm really glad to be working for a newspaper company," remarked Bud Kennedy, a metro columnist with 15 years at the Fort Wort Star- Telegram.
Frank McComas, Knight-Ridder operations vice president, earned applause from Star-Telegram staffers when he affirmed Knight-Ridder's commitment to newspapers.
Kennedy praised both Cap Cities and Disney for supporting the paper over the years ? including expanding the newsroom staff, building a new plant, and responding aggressively to competition from Dallas ? and said, "I think Knight-Ridder will make us feel like competitors and keep us in that spirit."
He will miss the four free passes a year to Disney World and the Mickey Mouse ears his editor doled out as a reward for good work.
"I think the general consensus is, 'Thank God we've finally been purchased by a newspaper company.' There are many of us delighted to work for people who understand buying ink by the barrel and dead trees," said Rich Hood, vice president and editorial page editor after 25 years at the Kansas City Star.
"We never belonged to Disney," Hood said, bitterly recalling how Disney chief Michael Eisner "stood here in the newsroom and said, 'We have no intention of selling the newspapers.' "
Noting the applause welcoming Knight-Ridder chief Tony Ridder to the newsroom, Hood attributed the optimism to Knight-Ridder's record of community involvement.
At the Wilkes Barre, Pa., Times Leader, where newsroom staffers hung Mickey Mouse, bound and gagged, in effigy from the ceiling, Allison Walzer, editor and senior vice president, said she was reassured by the presence of so many newsroom types when Ridder and company dropped by.
"We just never felt like we were important to Disney. We feel like we're important to Knight-Ridder, and it's much better that way," she said.
What's so good about it? For one thing, Knight-Ridder offers a lot more corporate support in terms of training and technology than the completely decentralized Cap Cities, she said, confessing, "I'm excited about having additional resources at my fingertips."

Tony Talks
Asked about the end of diversification, Ridder explained in an interview that Wall Street bought Knight-Ridder stock for the company's ability to run newspapers, not for its non-newspaper holdings.
"I love newspapers," the former reporter said. "We love newspapers."
While Wall Street analysts were mainly positive about the deal, he said, some criticized the decision to pay a price of 11 times cash flow when the company could buy its own stock for 8 times cash flow. In response, he said that despite its debt burden ? soaring to 55% of the company's value, from 38% ? Knight-Ridder is committed to buying back a minimum of 15 million of its own shares over a year.
Asked whether he was in the hunt for the Harte-Hanks papers, Ridder said, "We're out of money for now," but added that he is "comfortable we can afford this deal by selling KRI."
Of his reception at the four papers being acquired, Ridder positively gushed: "This is the best part of my job, seeing the smiling faces, happy people clapping. You could feel the friendliness and excitement. We came back feeling on cloud nine."
Knight-Ridder said it now had plans for its new papers, but did rule out new presses "for some more years" for the outmoded equipment in Kansas City.

Winding Down
Still for sale are Disney's three dailies, the Oakland Press, Pontiac, Mich., and, in Oregon, the Albany Democrat-Herald and Ashland Daily Tidings, six weeklies, the financial paper Institutional Investor, the auto publisher Chilton's, and several shoppers and specialty publications. Disney is retaining Fairchild Publications, including the trade paper Women's Wear Daily.
Phil Meek, president of the publishing group and a 27-year Cap Cities veteran, said overseeing the disposition of a group that generated $1 billion in annual revenue was a "bittersweet" task.
Meek said he was "as surprised as anyone" when Disney announced its divestment plans, "but I understood the decision. It was clear that we were not on the radar. And I didn't mind that because it let us operate the way we had. But in the long run, if you're not part of radar, you shouldn't be part of the company."
He has no hard feelings after concluding "that our publishing assets ought to be owned by people who live and breathe publishing."
Meek, who will be 60 in November and was Cap Cities' first publisher in Pontiac, Mich., plans to retire and catch up on his golf game.
?("This is the best part of my job, seeing the smiling faces, happy people clapping. You could feel the friendliness and excitement. We came back feeling on cloud nine.") [Caption]
?(? Knight-Ridder chairman and CEO Tony Ridder) [Photo & Caption]
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copyright # Editor & Publisher n April 12, 1997


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