McClatchy Acquiring Knight-Ridder: Responses (KRI, MNI)

posted on: March 14, 2006 | about stocks: KRI / MNI

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Yesterday the longstanding rumors were finally confirmed: Knight Ridder (KRI) accepted a $4.5 billion cash/stock offer ($2.7 billion in cash and $1.8 billion in stock) from the smaller McClatchy Company (MNI). The combined entity will become the second largest US newspaper publisher by circulation, behind Gannett.

McClatchy has already announced its intention to sell off 12 of KR's 32 dailies -- papers that aren't in 'premium high-growth markets' will be on the block.

Immediate stock reaction to the news: Knight Ridder closed down $1.08 at $63.92, and McClatchy closed down $1.51, at $51.55.

Responses from analysts, journalists and media experts:

● Newspaper analyst John Morton: 'This thing is being sold at a fire-sale price. This is a bad time to sell a newspaper company -- Knight Ridder's board of directors should not have done it.'

● Douglas Arthur, Morgan Stanley: 'This vaults an excellent management team and culture into the big time in this space and could provide for investors a new, exciting play in traditional media, given the pristine reputation of the McClatchy management. Much has been written and said about how the outcome of this deal might influence newspaper stocks in general, particularly given the tepid, apparent involvement of buyout firms. We suspect this issue is somewhat overwrought in the market currently and will not be that significant, at least near-term.'

● Michael Kupinski, A.G. Edwards: 'We believe some of those papers [to be sold] could garner higher multiples than that of McClatchy's purchase of Knight Ridder.'

● Moody's said they might lower McClatchy's credit rating: 'The acquisition will increase the publisher's debt relative to earnings before interest, tax, depreciation and amortization (EBITDA) to a pro forma level of 5.2 times, "significantly above tolerances for leverage that Moody's built into its outlook for McClatchy's credit profile," the ratings agency said.'

● Former executive editor of the Philadelphia Inquirer James Naughton: 'The question is, how much money will [McClatchy] have left over to invest in these newspapers if it needs so much cash to pay down this debt?'

● Herb Greenberg: 'the deal price of $67.25 is just a point or two above where Knight-Ridder was [a year ago]. While that marks a roughly 30% premium over Knight-Ridder's October 2005 trough, before its shareholders started agitating for a transaction, news of the deal has done little to jumpstart other newspaper stocks.
That's perhaps the most troubling part of the story: 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.'

● Jeff Jarvis: '[The sale of the 12 more established papers] says that smaller papers are worth more. I don’t think that will continue to be the case forever; the problems will trickle down. But the problem with big papers is that they’re too big: They try to be all things to all people; they have very high costs; there is no growth in the market and no growth in the business. Not pretty. '

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