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Timing of Possible Sale May Work Against Knight Ridder

Drops in circulation and advertising and rising Internet competition pose price obstacles.

November 21, 2005|Thomas S. Mulligan | Times Staff Writer

NEW YORK — The money managers who successfully prodded Knight Ridder Inc. to put itself on the market might have picked a more advantageous moment.

San Jose-based Knight Ridder, like other big-city newspaper chains, is suffering from chronic circulation and advertising declines, but there's also the persistent background buzz that the industry has its rear legs in a tar pit with nothing between it and extinction except a certain amount of useless thrashing.

Although much the same was said of radio at the dawn of television, the gloom over the competition that newspapers face from the Internet is hardly conducive to a bidding war for Knight Ridder and its collection of 32 daily papers.

Industry watchers nevertheless expect a number of potential buyers to at least look over the merchandise when Knight Ridder's investment banker, Goldman, Sachs & Co., starts presenting its sales pitch in a few weeks.

For The Record
Los Angeles Times Tuesday November 22, 2005 Home Edition Main News Part A Page 2 National Desk 1 inches; 42 words Type of Material: Correction
Knight Ridder -- An article in Monday's Business section about the timing of a possible Knight Ridder Inc. sale referred to workers at the Detroit Free Press as Knight Ridder employees. Knight Ridder sold the Free Press to Gannett Co. in August.

Bidders could include newspaper companies, cash-flush private equity firms and -- if Knight Ridder decides to break itself up and sell off individual properties -- newspaper employee groups or major hometown investors.

Of course, there's no guarantee that a sale will happen. Analysts such as Craig A. Huber of Lehman Bros. and Lauren Rich Fine of Merrill Lynch are doubtful that Knight Ridder will attract a bid high enough to satisfy its biggest shareholders, led by Private Capital Management of Naples, Fla., which holds a stake of about 19%.

At the top of most lists of potential buyers is Gannett Co., parent of USA Today and the nation's biggest newspaper company by circulation.

Among newspaper companies, "only Gannett would seem to have both the desire and the wherewithal to pull off a $5- or $6-billion purchase," said analyst John Morton of Morton Research Inc. in Silver Spring, Md.

Gannett spokeswoman Tara J. Connell said the company wouldn't comment on Knight Ridder specifically, but added: "I will say what we have been saying for years, which is that we'll look at anything that goes on the market."

Huber, in a report to Lehman clients this week, said that although Gannett could afford Knight Ridder, it might be better off making broadcasting or Internet acquisitions or even buying back its own shares.

Tribune Co., Chicago-based parent of the Los Angeles Times, might be attracted to a company with big newspapers in Philadelphia, Miami and San Jose to add to its own holdings in Chicago, Los Angeles and New York.

Analyst Harold Vogel of Vogel Capital Management said that even if a Tribune-Knight Ridder combination could pass federal antitrust scrutiny, "the economic model doesn't change. You're just doubling up your bet on a troubled industry."

Newspaper circulation in the United States has slipped by 9 million, or 14%, from a 1984 high of 63.3 million, as young readers increasingly flock to online news sources. As circulation has fallen, so has advertising. The decline has steepened in recent years, with classified ad revenue falling 15% from 2000 to 2004.

The industry has always been cyclical, as advertising spending tends to track the economy, but analysts have noted that the deterioration over the last few years has come despite reasonable U.S. economic growth.

Vogel, like many other observers, believes that with the Internet increasingly pulling readers away from newspapers, the industry faces further declines. Even so, he said, the business will generate cash for years to come, so there will be buyers for newspaper companies.

Aside from newspaper chains, the most frequently mentioned potential buyers are private equity firms, which have been building cash for years and are anxious to put their money to work. The structure probably would be a leveraged buyout, in which much of the purchase is paid for with borrowed money.

Firms such as Kohlberg Kravis Roberts & Co., Providence Equity Partners and Carlyle Group have been mentioned as possible suitors, but there are "any number of private equity funds" that could afford such a deal, alone or as part of a consortium, said James Walden, an analyst at Morningstar Inc. in Chicago.

But would they pay up?

Huber said that a sale price of $71 a share -- $6.2 billion total, including debt -- would be 11 times Knight Ridder's estimated 2006 cash flow, at the low end of multiples at which newspaper companies have sold over the last five years.

That price, he said, is probably too low to satisfy Private Capital Management or Knight Ridder's other major outside shareholders. At the same time, given the borrowing costs that such a deal would entail, he said the price is too high to generate more than a low single-digit annual return for the private equity shops -- far too low for the risk involved.

Henry R. Berghoef, chief of research at Chicago-based Harris Associates, which owns 8.5% of Knight Ridder and has joined Private Capital Management's call for a sale, said of the newspaper industry, "I think the doom and gloom is overblown."

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