UPDATE #2: Analysts Warming to Knight Ridder Deal?

By: E&P Staff Veteran newspaper analyst John Morton told Reuters this morning, "This is a bad time to sell a newspaper company -- Knight Ridder's board of directors should not have done it. ... This thing is being sold at a fire-sale price." But when reached by E&P this afternoon, Morton took more of a shine to the deal after learning more details.

"Now that we know a little more with Knight Ridder's pro forma cash flow it doesn't quite seem like the cheap sale," he said. "I think they got a fair price for it."

But Herb Greenberg, the MarketWatch and CNBC commentator, observed: "The good news, from a journalist's standpoint, is that the remaining Knight-Ridder papers are going to a chain known for good journalism. The bad news: that it had to come to this....No matter what happens in this space, short of rising revenues, investors want to treat newspapers -- cash flow or no cash flow -- as yesterday's news."

Prudential Equity Securities, meanwhile, downgraded McClatchy from "neutral" to "underweight" on the news this morning that McClatchy has agreed to purchase Knight Ridder for approximately $6.5 billion.

If the deal closes, the biggest risk to McClatchy is slower than anticipated revenue. In addition, the sale of 12 Knight Ridder properties "could be a significant discount to the total purchased multiple of about 9.5 times, which would dampen investor interest," according to the report.

The research firm does find some good news in the properties that McClatchy plans to keep since they were priced 10 and 11 times EBITDA. "The industry isn't as bas as some investors perceive," wrote Prudential analyst Steven Barlow.

Bear Stearns said, "The acquisition multiple is generally in line with expectations" but below the "take out" range in the Lee purchase of Pulitzer last year. "We believe this deal has little impact on valuations of the newspaper group, as it is cheap enough ... to prevent any rally but not so weak as to suggest a significant sell off. We are concerned however that with this deal behind us, investors will once again focus on fundamentals, which remain poor. ..."

Merrill Lynch, which had seemed to anticipate the McClatchy deal, said the deal "would be attractive financially" to the company but added that "the multiple paid is unlikely to produce much cheer for newspaper investors." For KR employees, however, "We think this would be one of the better outcomes."

Merrill Lynch said this afternoon it was no longer advising on Knight Ridder and changed its investor opinion to ?no rating.? Investors should no longer rely on Merrill Lynch?s prior analysis, estimates or rating on Knight Ridder, it explained.

As of this afternoon, McClatchy's stock was trading down $1.23 to $51.83, and Knight Ridder shares fell $0.3 to $64.97.

Goldman Sachs issued this report: "With a strong track record of management execution and proven skill in acquiring and integrating newspaper properties, we believe McClatchy's planned acquisition of Knight-Ridder makes strategic sense, although many questions
remain on the financial implications of the deal. ...

"The price is at the top end of market expectations and set against a challenging industry backdrop. McClatchy shares, already down roughly 28% in the past year (vs. an 8% gain in the S&P 500), will be closely watched until the company (1) demonstrates its ability to boost profitability at the acquired papers and (2) successfully executes the sale of 12 properties at a price close to the multiple paid for KRI."