On the Road to Freedom?

By: Lucia Moses Conflict is as much of a family tradition at Freedom Communications Inc. as libertarianism. Its founder R.C. Hoiles parted ways with his brother and newspaper partner, Frank, back in the 1920s over a political dispute. The latest troubles stem partly from Harry Hoiles, R.C.'s son, who sued to break up Freedom in 1982, believing it had strayed from his father's philosophical mission.

Taking up Harry's cause was his son, Tim Hoiles, who considered the company's decision in the 1980s to enter the TV business antilibertarian (by that point, it owned 24 daily newspapers). Last summer, he started pushing publicly for the company to buy out his 8.6% stake. But the shareholder discontent wasn't just philosophical. Other Hoiles family members were furious about the company's ill-fated magazine and Internet forays that in 2001 led to losses of $110 million before taxes.

Though Tim Hoiles may not have planned for things to end up this way, Freedom, based in Irvine, Calif., now seems headed for a sale of all or at least part of its assets. At a get-together last summer, family members agreed to pursue options that would include a sale of the company. Members of the fourth generation of newspapering Hoileses sought a plan to buy out their elders, but their resources didn't match their ambitions. Seven months later, on March 6, with the status quo no longer an option, the board agreed to invite bids from would-be buyers.

A company's adherence to its founder's political bent seems an anachronism today. A family-owned newspaper company making it to the fourth generation of ownership is even more rare. It's usually at this point that shares are spread thin among restless family members who, having no involvement or interest in the business, decide to cash out. Publicly traded newspaper companies now account for almost half the country's daily circulation.

That figure would break the 50% barrier if Freedom, with its daily-newspaper circulation in excess of 1 million, were to be sold to a publicly traded company. So the move, on top of everything else, is loaded with symbolism.

Long before the board's formal decision to invite bids, prospective buyers who smelled a prime opportunity were already circling. The No. 12 newspaper chain by daily circulation, Freedom is anchored by The Orange County Register in Santa Ana, Calif., with a circulation of 300,888 and three Pulitzer Prizes to its credit. It's bolstered by The Gazette in Colorado Springs, Colo., the East Valley Tribune/Scottsdale Tribune in Mesa, Ariz., and 25 smaller dailies stretching from coast to coast. Thirty-seven weeklies and eight small-to-midsize TV stations round out the portfolio, expected to fetch more than $2 billion if sold to one bidder. The last comparable deal was Gannett Co. Inc.'s $2.7-billion purchase of Central Newspapers Inc. in 2000.

One-stop shopping

At least a dozen one-stop shoppers might emerge now that the company is officially in play, says London-based broker Christopher Shaw, who has talked with many of them. Given the rarity with which dailies come on the market, he says, "I'm not sure people are going to be too careful about their [acquisition] criteria."

Selling to a single buyer would have fewer tax consequences, not to mention lawyer fees, for the seller, making it a better deal for Freedom shareholders.

And history suggests that's the most likely outcome. While the properties individually would invite scores of shoppers, few companies have the ability and desire to buy the whole shooting match.

Let's start with the obvious: Gannett, already the biggest dog on the block with daily U.S. circulation of 7.6 million, is the most-logical player for several reasons. It has the ability, given its low debt-to-EBITDA (earnings before interest, taxes, depreciation, and amortization) ratio, and the appetite. "At a price, it's something we would like to add to the Gannett group," Chairman, CEO, and President Douglas H. McCorkindale said at an analysts' meeting last week. Freedom's papers would fit into the Gannett fold in terms of size and geography, and its TV properties would augment Gannett's broadcast holdings, giving it a second station in Grand Rapids, Mich., and a newspaper/TV combo in Lansing, Mich.

As a private company, Freedom doesn't release financial information, but William Drewry, a Credit Suisse First Boston analyst, estimates Gannett's margins are 11% higher on the newspaper side and 18% higher on the TV side than Freedom's, giving Gannett ample opportunity for margin improvement.

Or maybe Gannett just wants to buy -- and sell? "I think Gannett would like to take the whole thing down and sell off pieces," says Ken Berents, an analyst with Goldman Sachs Asset Management. One such piece might be Freedom's 96,221- circulation Tribune in Mesa, where its proximity to The Arizona Republic in nearby Phoenix could raise an antitrust issue for Gannett.

An offer for cash and Gannett stock could be tempting to shareholders. If a bidding war ensues, however, it could bump the price above Gannett's comfort zone. Says media analyst James C. Goss of Barrington Research, "If you know anything about Gannett, they're not going to get into a bidding war."

It's easy to see why the McClatchy Co. would be interested in the company. Freedom's California papers -- five, including the Register -- would complement McClatchy's three Bees to the north, and some of its six North Carolina dailies would fit well with The News & Observer in Raleigh. The TV group and other papers, especially in slower-growth markets, would then be candidates for sell-offs. McClatchy has been paying down its debt since buying Minneapolis' Star Tribune in 1998, and while CEO and President Gary B. Pruitt has indicated he's not willing to pay the high prices being asked for TV stations, he is interested in expanding the newspaper portfolio.

Despite its strong balance sheet, McClatchy would find biting off all of Freedom a bit of a stretch, as its market capitalization Wednesday was only about $2.5 billion versus Gannett's $19.2 billion. The company had a market cap of $1.8 billion when it paid $1.1 billion for the Star Tribune, says John Miller, vice president of Chicago-based Ariel Capital Management, a McClatchy stockholder.

McClatchy then fell, briefly, out of favor on Wall Street. Buying Freedom, he notes, would be "taking on a lot at this point."

Says Kevin Lavalla, managing director with Jordan, Edmiston Group Inc. (JEGI), who has 19 years of experience in newspaper transactions, "It's just whether they would want to do it and take the heat."

Some see MediaNews Group Inc., the No. 7 newspaper company, as having an appetite for Freedom, although, like McClatchy, it too could end up spinning off some of the pieces later. The aggressive and acquisition-minded William Dean Singleton already shares a newspaper presence with Freedom in California, Colorado, and New Mexico, and has broadcast ambitions as well.

Another view holds that Singleton is too occupied with digesting his $200-million purchase of The Salt Lake Tribune in 2001 and ongoing legal battle with former managers who claim they have a right to own the paper. MediaNews' private ownership status makes it hard to accurately size up its capacity for acquisitions, though.

In the end, "I think it's Gannett and McClatchy," says Joseph Barletta, who formerly was a Freedom chief operating officer and now is a San Francisco media lawyer advising Tim Hoiles. "The other usual suspects I don't think are interested in Freedom." Those include Knight Ridder, the Tribune Co., and Advance Publications, which have placed their bets on bigger markets, although the North Carolina dailies could be interesting to Knight Ridder, which could sell off other papers and the TV group. The Register would be the most attractive from a Tribune perspective, but antitrust considerations could preclude the Los Angeles Times parent from owning its Orange County rival.

Scott Stawski, client executive at the Chicago-based Inforte Corp. consultancy, takes the contrarian position that the New York Times Co. makes more sense than others as a buyer of Freedom in toto. With almost no long-term debt, the Times Co. clearly has the wherewithal. Freedom's community newspapers overlap with those of the Times Regional Newspaper Group in three states, while its TV group would enlarge the Times Co.'s broadcast holdings. Stawski, who has worked with the Times Co. and other big newspaper companies, says the smaller papers also would support the expansion of The New York Times' national edition by delivering the paper, which the Times often pays outside papers, including the L.A. Times, to do.

Stawski argues that, political leanings notwithstanding, the Times Co., with its tradition of editorial quality and family ownership, is a better cultural match for Freedom than is Gannett. "While there may be political differences between The New York Times and Freedom, I think there are some synergies," he says. "Gannett is known for very good newspaper operations, but you wouldn't say that top of mind is the editorial product."

Others assert the Times Co.'s ambitions lie elsewhere. "Their avowed strategy is to get rid of the smaller stuff," says Charles Wrubel, managing director at AdMedia Partners Inc. in New York. Freedom "wouldn't make sense," given the company's publicly stated strategy of expanding the Times national edition and building strong regional clusters, as it has in New England, Times Co. spokeswoman Catherine Mathis says. As for the regional overlap, Mathis pointed out that the Times Co. recently sold several regional papers because they didn't meet its projected growth criteria.

Little is known about the private and famously quiet Hearst Corp.'s ambitions, but it's not to be discounted as a potential buyer of all or most of Freedom. Hearst, with its San Francisco and Seattle metros, is said to be looking for growth opportunities, and might take an interest in Orange County and Colorado Springs to enlarge its Western presence. Barrington Research's Goss imagines a coordinated effort by Hearst and its majority-owned spinoff, Hearst-Argyle Television Inc., to buy Freedom's newspapers and TV groups, respectively.

Try some, buy some

Some observers, such as Lavalla of JEGI, see a breakup of Freedom more likely, given the diversity of its papers in circulation size and geography. If Freedom is sold off in parts, there's hardly a company with deep pockets -- in addition to the aforementioned -- that wouldn't want to get in on the action.

Going from west to east, hotly contested states could be California, where Freedom publishes two papers in San Bernardino County that could serve the interests of Belo, parent of The Press-Enterprise in nearby Riverside -- or Lee Enterprises Inc., which gained a California foothold last year with its purchase of Howard Publications, including the North County Times in Escondido. Even though Howard set it back $694 million, Lee has the ability to buy more. "A lot of those newspapers would fit our acquisition strategy, so we plan to take a look at it," Lee spokesman Daniel K. Hayes says.

In Colorado, MediaNews could have competition from its Denver joint-operating-agreement partner, the E.W. Scripps Co., for The Gazette in Colorado Springs, Freedom's No. 2 paper.

Freedom's Texas papers also could invite interest from Scripps, which publishes a daily 75 miles from Odessa, or the Morris Communications Co. LLC, which has two papers within 200 miles. The biggest player in Texas is Hearst, though, which could gain operating efficiencies from owning Freedom's papers, which are near its dailies in San Antonio, Midland, and Laredo.

In Missouri, one of four states where Freedom has a stand-alone daily, Knight Ridder and Pulitzer Inc. could fight over The Sedalia Democrat, which lies just outside the Kansas City area -- if Gannett doesn't get there first. Another Missouri publisher, Morris, also could be a player.

The two southern Illinois dailies might have a number of possible bidders, including nearby operators Copley Press Inc. or Pulitzer. Lee, which gained four Illinois papers as part of its Howard deal, also could be interested, as could Birmingham, Ala.-based Community Newspaper Holdings Inc., which has been on the hunt for 15,000-to-50,000-circulation papers. "I think we probably have interest in some of the papers Freedom has," says Mike Reed, CEO of CNHI. Reed likely has looked at Indiana, where Freedom's lone daily there is sandwiched between Gannett and CNHI clusters to the north and south, respectively.

Another stand-alone daily, in northwestern Ohio, lies in Gannett territory, but also could fit with the Ohio-based Brown Publishing Co., a family-owned outfit that has been an active buyer lately in Ohio and elsewhere. Cox Enterprises Inc., while still digesting previous acquisitions, also could be interested in Lima, which lies north of its Springfield and Dayton dailies.

Going strictly by geography, Gannett, with Pensacola to the west, and Knight Ridder, with Tallahassee to the east, seem the most logical bidders for Freedom's two Florida Panhandle papers, although publisher and broadcaster Media General Inc. also could see an opportunity there to expand its Southeastern footprint.

All three chains could meet again in North Carolina. Freedom's Shelby and Gastonia papers lie betwixt and between Gannett, Knight Ridder, and Media General territories. Landmark Communications Inc. is a potential bidder for the Burlington property, neighbor to its 90,432-circulation News & Record in Greensboro. Jacksonville and Kinston could be attractive to McClatchy, parent of The News & Observer in Raleigh.

Going without air?

Between publishers seeking cross-ownerships with TV (anticipating a relaxing of federal ownership rules) and newspaper companies that want to build or expand TV businesses, AdMedia's Wrubel predicts a "feeding frenzy" for Freedom's TV stations, individually or together.

With three ABC and five CBS affiliates, the group as a whole "is pretty attractive," agrees Thomas J. Buono, chairman and CEO of BIAfn, a media investment bank and consultancy, who estimates the division could fetch $500 million to $600 million. Broadcast companies looking to expand their holdings also rate as possible contenders, with Lin TV Corp. being an analyst favorite.

Another possibility is that multiple buyers will carve up the company among themselves and make a single bid for it, a trend among private-equity firms that are pooling their cash and spreading their risk with joint bids, says Bear, Stearns & Co. newspaper analyst Kevin Gruneich. "It makes it easier to finance, and reduces the auction competition," he says, adding, "I suspect there's a lot of conversations going on between parties."

One possibility: A deal between Gannett and MediaNews, which are linked by an existing partnership that manages some of their newspapers in California and a new one, announced March 17, to operate their Texas and New Mexico papers. Alternatively, Freedom could accept a bid for its TV stations, raising enough money to buy out disgruntled shareholders and -- surprise, surprise -- retain the newspapers.

Tim Hoiles has said the decision to solicit bids was a market-driven way to decide the value of the company that's in keeping with the founder's libertarian principles. But any sale must be approved by Freedom's 80 or so shareholders, who also care about other, nonfinancial values and aren't obligated to take the highest bid. "I think there are a majority of shareholders that wish to sell, but there are a number that don't want to," notes Barletta.

Shaw says that while "credibility" is always an issue, "the only offers come from substantial and credible buyers." In the end, only the shareholders know which values they'll exercise if and when Freedom's future comes to a vote.