Philadelphia Freedom: Analysts Say Investors Got Good Deal -- But McClatchy Seems Satisfied

By: Jennifer Saba Advertising executive Brian Tierney managed to pull off quite a deal yesterday when a group he fronted won the bid for The Philadelphia Inquirer and the Daily News (PNI) for $562 million. Not only did Tierney's group, Philadelphia Media Holdings, beat two seasoned newspaper executives reportedly involved in the auction -- Mortimer Zuckerman and Dean Singleton -- he picked up two major papers at a very nice price, indeed.

During a victory lap at the papers' printing plant -- a $300 million investment Knight Ridder made during the early 1990s -- the Inquirer reported that Tierney turned to PNI Publisher Joe Natoli and said: "Hey, I got a call from Dean Singleton, and he said I got a pretty good price."

In fact, the $562 million price tag almost represents a fire sale compared to past newspaper transactions involving metro papers. To put this deal into perspective, McClatchy paid twice that much -- roughly $1.2 billion -- when it bought the Star Tribune in Minneapolis in 1997. The New York Times Co. spent about $1.1 billion for The Boston Globe in 1993.

The press statement announcing the Philadelphia purchase on Tuesday declined to release the multiple of the transaction, explaining that McClatchy didn't want to disclose "the profitability of a single business operation, which is contrary to McClatchy's practice and against the buyer's wishes."

McClatchy's CEO Gary Pruitt followed-up on the statement saying, "It's important to note that the price is right in line with our expectations and with our broader projections for the proceeds to be raised in our previously announced divestiture process." But what were the company's expectations?

It's a change of heart from when McClatchy sold the San Jose Mercury News, St. Paul Pioneer Press, Contra Costa Times, and The Monterey County Herald to Singleton's MediaNews Group for $1 billion. In that release McClatchy crowed that the multiple represented 11.5 times EBITDA.

Bear Stearns analyst Alexia Quadrani believes the multiple for the Philadelphia papers is around 8 to 8.5 times 2006 EBITDA of $67 to $70 million, she said in a report.

Prudential Equity Research's Steven Barlow thinks it's more like 9.6 times EBITDA based on an estimated current 2006 budget of $58 to $60 million and that the in 2005 both papers earned $75 million in EBITDA.

Granted, the Philadelphia papers have been beset by plummeting circulation, declining ad revenues, and increasing costs plaguing other large metros around the country (including the Star Tribune and Boston Globe.) And Pruitt has said repeatedly the price is not the only thing McClatchy considers but also how the deal is structured, the speed of closing, and the interest of employees and the communities. "No one factor trumps all others," he told E&P in April.

McClatchy is also well on its way to its goal of getting about $1.4 billion (after taxes) with the sale of 12 Knight Ridder properties. McClatchy paid $6.5 billion for Knight Ridder and plans to put the net proceeds from the sales towards its debt. Prudential estimates McClatchy will net $400 million from the Philadelphia deal and about $700 million from the MediaNews acquisition. The company needs to net $300 million to reach its target.

Six Knight Ridder papers remain on the block: Akron (Ohio) Beacon Journal, Aberdeen (S.D.) American News, Duluth (Minn.) News Tribune, The News-Sentinel in Ft. Wayne, Ind., The Grand Forks (N.D.) Herald, and The Wilkes-Barre (Pa.) Times Leader.

Barlow wrote in his note that Prudential thinks McClatchy got a good price for the properties: "As the buyers are locals, we do not think a high return on investment capital was their overriding metric to determine the price. This is not a sports team where the exit multiple is usually higher no matter how the asset performs."

Analyst John Morton said yesterday: "It can turn out to be that these local owners will be satisfied with 10% margins which will certainly be good. The won't have Wall Street to satisfy, thank god."