A High Price For Knight-Ridder Sale Would Have Signaled A Bright Future For Newspaper Valuations, But McClatchy Paid Practically No Premium And Yet In The Intervening Weeks Its Shares Have Dropped 12% To A Four-Year Low. What Does That Tell You?

The three main shareholders in Knight-Ridder who forced the sale thought it was OK, too, in that Knight-Ridder sold for 30% more than it was valued before they insisted on a sale, and at least they’re getting out having covered their costs of buying the K-R shares in the first place, Tony Ridder was upset because McClatchy didn’t tell him about the 12 newspapers it was reselling including the flagship San Jose Mercury-News, but the industry gave a sigh of relief that a deal got done at a decent price showing newspapers were still a viable business proposition.

But now it’s the turn of investors to speak, and they are – with their feet – they’re bailing out of McClatchy. It seems the more they look at the debt McClatchy is taking on, plus prospects for the newspaper industry as a whole based on recent quarterly reports that seem to get worse with each successive quarter, the more they flee the scene. It appears those investors would have been happier if McClatchy was going to take on that kind of debt then it be in a business with far better returns -- the Internet -- rather than aging newspapers, even if they are in so-called growth markets.

Since McClatchy reported the deal, its shares have dropped 12% to reach a four-year low. The company didn’t help itself by reporting its own first quarter net revenue numbers dropped to $22.7 million from $32.3 million for the same quarter a year ago, and the shares got punished 2% for that alone.

The main villain was expensing stock options, but analysts don’t like quarterly results 10 cents a share worse than the year before, whatever the reason. Revenue came in at $282 million, about $1 million more than the year before but $4 million less than analysts had predicted.

Not helping matters, Knight-Ridder’s own 1st quarter numbers were appalling – with profit dropping to $28.4 million (42 cents a share) from $60.5 million (79 cents a share) a year earlier.

McClatchy expects to close its Knight-Ridder deal around July 1 and would like to announce the sale of the 12 newspapers as soon as possible thereafter. It is said to be in advanced negotiations with Media News to sell four of the K-R newspapers including the Mercury-News.

One of the interesting items to come out of a McClatchy filing with the Securities and Exchange Commission is that although several media companies had expressed interest in Knight Ridder at the end of the day it was the only media company to bid for all of the company although private equity firms had put in a bid at a much lower price.

So where, for instance, was Gannett during the original sale -- it took a look and dropped out -- and where is it now in buying any of those 12 newspapers that McClatchy is selling? According to Chairman Douglas McCorkindale, Gannett is not involved in this round of sales, either, but it does have a close working relationship with Media News so it may be lurking behind the scenes.

For investors what would have been the better deal for McClatchy – spending some $3 billion for 20 newspapers or the same amount for Internet properties like about.com, marketwatch.com, Intermix Media, iVillage, and a couple of others of those sizes?

ftm background

The Popular Spin Is That Newspapers Are Still A Great Business, Just Not As Good As They Once Were. So How Come Moody’s Downgrades Dow Jones, and Puts New York Times and Tribune Under Credit Watch, and Knight-Ridder Sold for Basically No Premium?
Newspapers are a business that on average still produce operating profit margins of around 19% in the US – some countries even more -- and that kind of figure is the envy of many other business sectors. But the margin has been dropping through the years and the main question Wall Street is asking is where does it stop?

Lee Bought Pulitzer Last Year for 13.5 times Earnings Yet McClatchy Paid Just 9.5 times Earnings For Knight-Ridder. What Does That Tell You About the Value of Newspapers Today?
That someone, it happened to be McClatchy, paid about $67.25 a share for Knight-Ridder -- some $4.5 billion plus absorbing K-R’s $2 billion of debt -- was about what the markets expected. But where was Gannett and all those private equity companies that were expected to put in bids? The word is they dropped out, which gives as good an indication as any that newspaper valuations are not what they used to be.

When Knight-Ridder’s Largest Shareholder Told the Company To Sell Itself, The Shares of Most Newspapers Companies Jumped In the Hope This Was the Start of Good Times Ahead. Actually It Was The Start of That Shareholder Dumping Some $2 Billion Worth of Shares Involving Nine Newspaper Groups
Last November, the largest shareholder in US newspaper shares shocked Wall Street by demanding that Knight-Ridder (K-R) put itself up for sale to enhance shareholder value. The next two largest shareholders joined in and the die was cast. Shares in K-R and most other publicly quoted companies rose strongly and immediately on the hope this was just the start of improving shareholder value for that market sector.

In answering that question consider the most recent data. According to Deutsche Bank, in a new study with MediaPost, online ad spending in the 1st quarter was up by 9.3% over the last quarter of 2005. And last month alone, according to Nielsen/NetRatings AdRelevance there were 185 billion display ads on US Internet sites, 30% more than in February and nearly double than in March, 2005.

Then compare that with Merill Lynch’s ad outlook released earlier this month in which newspaper ad growth for 2006 was lowered from all of 1.8% to -0.2%.

It’s becoming a pretty accepted goal that newspaper groups need to grow their online revenue to some 20% of total revenues within three years. There is no question that the 20 newspapers that McClatchy is keeping will produce very nicely for the bottom line. But the real long-term question remains is that where the investment money belonged.

For now, at least, McClatchy investors don’t seem to think so. And by their non-participation in the original Knight-Ridder deal it looks like many media companies don’t think so, either.