Knight-Ridder Hired Goldman Sachs to Garner Shareholder Value Via a Sale, So At Least That Wall Street Firm Has a Positive Outlook for the Newspaper Industry? Well, Actually, No, It Believes Revenue Growth Looks “Challenging” -- What a Great Sales Pitch!

Philip M. Stone November 18, 2005

Everyone was expecting US newspaper circulation numbers for the past six months to be bad. But very few expected them to be THAT bad. At the San Francisco Chronicle, for instance, nearly one in five subscribers quit. Overall, the country lost 1.2 million subscribers, 2.6% of its base.
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So with most major newspaper companies seeing their shares down some 20% this year, the shareholder revolt has begun. First target is Knight-Ridder, the second largest US newspaper group. It saw big circulation percentage declines in its bigger city newspapers, and smaller percentage declines in the smaller cities. Its three biggest shareholders have told it to put itself on the bloc so shareholders can gain true value for their investment.

Knight-Ridder turned to its long-time financial adviser Goldman Sachs to investigate the group’s various options, including being sold, so it makes sense to look at what Goldman Sachs thinks of the newspaper industry’s fortunes these days. Surely the guys charged with trying to make a sale have a positive outlook. Well, think again.

Goldman Sachs, in a recent note published before taking on its K-R mission, gave a particularly bleak view for newspaper revenue growth.

“As investors think about the prospects for the newspaper sector in 2006, we offer the following question: If publishers have struggled to post 2-3% ad revenue growth this year in what should be the ‘sweet spot’ of the economic cycle how likely is it that revenue growth will accelerate in 2006?

“Our answer: very unlikely. We think growth expectations may be too optimistic, with consensus calling for an average earnings gain of about 8%. While aggressive share repurchase activity should boost EPS in 2006, absent a pick-up in revenue growth, we are likely to see continued downward pressure on estimates. 

“Accordingly, we continue to recommend investors stay underweight in the sector.” the note said.

And as for the rest of this year, Goldman offered little hope. “Sadly, 2005 is shaping up as the industry’s worst year from a revenue growth perspective since the recession impacted 2002-2002 period, with no signs of improvement in the fourth quarter.”

And while it is true that one positive aspect for newspaper companies is their Internet operations – in many cities the local newspaper web site is the premier site people visit for news -- Goldman puts that into perspective, too. “While online growth is impressive, we estimate that it will only represent about 5% of industry ad revenues in 2006, not sufficient to move-the-needle in terms of overall industry growth.”

It’s not that newspapers aren’t good profitable businesses these days. Historically they have about a 20% margin and the cost cutting (layoffs, buyouts and the like which already totals more than 1,900 for the year according to Editor & Publisher) is intended to maintain those types of margins.

But investors are not so much interested in how things are going today, but rather the outlook for tomorrow. And that means the Goldman Sachs note is not going to help the company find buyers except for those in the industry who already have a fair idea of what to expect, or those outside the industry who will come with very big scissors to cut away everything they identify with their new eyes as waste.

Goldman Sachs did see one bright spot -- that classifieds are on an upwards trend again – and that’s very encouraging because many newspapers make from 20% - 30% of their revenues from classified –Goldman seeing the numbers up by some 4-5% this year. Considering there has been so much revenue loss from Craigslist and the like, that really is a remarkable improvement.

But then came the introduction last week of Google Base, and a new Goldman Sachs research note warns that if Google turns this technology towards the classified market it will be gloom and doom for newspapers.

Google Base allows users to store information in an online database that is searchable. It doesn’t take much imagination to see how that technology could apply to classifieds, certainly in the long-term.

“While the success of Google Base is not assured, we think it inevitable that newspaper publishers will see erosion in their classified ad share over the next five years as the number of alternatives to traditional print classified ads grows. This is a key reason for our cautious investment view on the sector,” the research note said.

Read all of that and the only conclusion one can make is to to stay away from buying a newspaper unless it is offered at an absolute bargain price – not exactly what the shareholders have in mind!

Meanwhile a group of former K-R editors say they will try to get representation on the K-R Board of Directors, but they have already received a lesson in the financial facts of life from K-R- spokesman Polk Laffoon IV.  Since most of the company’s shares are held by institutional investors they “are not going to vote for a slate of former Knight-Ridder employees whose dominant priority is the creation of good journalism. I wish it were otherwise."

Knight-Ridder last year earned $326 million on revenue of $2.9 billion. It is capitalized at just over $4 billion.

Goldman Sachs will no doubt spend quite some time looking at the K-R books and interviewing key executives as it prepares documentation for perspective buyers.

What would really be interesting to read is how they plan to counter their own published arguments on why not to invest in the newspaper industry!

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Knight Ridder Adds Morgan Stanley As A Second Opinion to Goldman Sachs – November 30, 2005

Knight Ridder has announced it has hired Morgan Stanley to provide a second opinion to Goldman Sachs as it searches for ways to increase its value, including the possible sale of the all or part of the company.

Morgan Stanley has had a business relationship with KR during the past 12 months and its main media analyst, Douglas Arthur, has been somewhat positive towards the company.

Arthur has a "buy" rating on the stock. "I think they're cheap; most people don't."

He has been quoted as saying he believed Goldman would find a buyer for KR because usually a Wall Street firm earns more if it makes a sale.