Fresh Details on How McClatchy Made Its Big Deal

By: E&P Staff A front-page story in Sunday's Sacramento Bee, flagship paper for the McClatchy Co., reveals many fresh details on the company's giant, and risky, deal for 32 Knight Ridder newspapers.

The article by Dale Kasler opens with an arresting anecdote.

Pat Talamantes, the company's chief financial officer, was having lunch at a Crepeville restaurant in midtown Sacramento on Nov. 1 when his BlackBerry went off. It was an e-mail from Gary Pruitt, chairman and chief executive of The McClatchy Co. "Knight Ridder in play," Pruitt wrote. "Let the games begin."

Less than five months later, Pruitt had made the successful $6.5 billion bid for the Knight Ridder papers, then turned around and put 12 of them back up for sale.

Near its conclusion the article describes McClatchy officials flying to New York to finalize the deal:

"The night of March 10, though, the mood at McClatchy was celebratory. Five executives ... flew to New York on the company's Falcon 2000EX jet. Onboard they listened to Bruce Springsteen, blues legend Leadbelly and others from Pruitt's vast music collection. They landed at 3 a.m."

According to the article, shortly after Pruitt learned last fall that investor Bruce Sherman was forcing a Knight Ridder sale, "he did something extraordinary. He bounded into The Bee's business-news department to alert a reporter about Sherman's move.

"Though he offered a polite 'no comment' when the reporter asked if McClatchy might bid, clearly the wheels were spinning. In mid-November Knight Ridder announced it was for sale. McClatchy executives began briefing the board of directors, including members of the McClatchy family, about a possible offer. ...

"Still, making a play for Knight Ridder wasn't automatic. Pruitt says McClatchy was doing fine with or without Knight Ridder, and he wouldn't do anything that didn't make financial sense. The actual decision to submit an offer 'was evolutionary,' said Karole Morgan-Prager, the in-house counsel who would help draw up the bid papers.

"There was a sense on Wall Street that the industry's woes meant Knight Ridder could be had on the cheap. But McClatchy was wary of low-balling it. Two years earlier it thought it made a strong bid for the paper in Durham, N.C., but lost. 'We got blown out,' Pruitt said."

After deciding it would have to shed some under-performing Knight Ridder paper, figuring out what to keep "took time. McClatchy dispatched executives to some of Knight Ridder's largest papers, and one of its smallest, the Sun Herald in Biloxi, Miss., to witness the city's post-Hurricane Katrina recovery. A consultant supplied population growth projections for all Knight Ridder markets.

"A week before the bid deadline, the McClatchy board gave the green light. A press release, announcing the deal but leaving out financial details, was drafted.

"At the same time, McClatchy made a final decision on the spin-offs. Twelve papers would be sold, including such journalistic gems as the San Jose Mercury News and Philadelphia Inquirer.

"Philadelphia wasn't shocking, given its low profit margins and significant loss of circulation to suburban competitors. But San Jose -- the heart of Silicon Valley and one of the nation's most affluent communities -- was a surprise. 'Going into the process, we figured it would be a keeper,' Pruitt said.

"The analysis showed slim profit margins and slow population growth. The Mercury News was the last paper to get cut. ...

"McClatchy submitted its bid the afternoon of Thursday, March 9, some 15 minutes before the 5 p.m. EST deadline.
'We were by no means confident that we would win,' Pruitt said.

"The next day Pruitt heard from David Weil at McClatchy's investment bank, Credit Suisse. Knight Ridder wanted more money. The call implied McClatchy was in the lead. But it guaranteed nothing. Knight Ridder might have been saying similar things to other bidders.

"After hours of haggling, agreement was reached on price: $67.25 a share in cash and stock, or $4.5 billion, plus the debt assumption."

After the flight to New York, Saturday, March 11, "was spent hashing out the details. Company executives, investment bankers and lawyers zipped back and forth between Black Rock, home of Knight Ridder's law firm, Wachtell Lipton Rosen & Katz, and a makeshift McClatchy war room at the Brunswick Group public relations firm a few blocks away. And that night Pruitt met for three hours at Black Rock alone with Ridder."

With the deal approved, the McClatchy group met at the French restaurant in Greenwich Village. "That led to one final negotiation: securing dinner for Pruitt, who'd stayed behind to phone McClatchy family members and prepare for the next day's announcement," Kasler concludes.

The solution: takeout.