The auction process for Knight Ridder Inc., which winds down this week, is a moment of reckoning for the newspaper industry, a time when one of their biggest players will find out just what others are willing to pay for it.
However, the bidding also presents a thorny dilemma for newspaper companies themselves as they prepare their final offers, which are due on Thursday, for the publisher whose 32 daily newspapers include The Philadelphia Inquirer, The Miami Herald and the San Jose Mercury News.
If big newspaper owners such as Gannett Co. don’t step up and make what investors believe to be a strong bid, pessimists might take it as a sign of waning confidence in the future prospects of an industry that many already believe to be in decline. On the other hand, paying a rich price could also lead investors to punish the acquiring company. “It’s a Catch-22,” says Merrill Lynch newspaper analyst Lauren Rich Fine.
San Jose, Calif.-based Knight Ridder has been mum about the bidding process all along, and declined again on Wednesday to make any comment.
Industry leader Gannett, Sacramento, Calif.-based McClatchy Co. and privately held MediaNews Group Inc., based in Denver, are all considered likely contenders but have given no outward sign of their intentions. Gannett and McClatchy both declined to comment, and MediaNews didn’t return a call seeking comment.
Also in consideration are several private-equity buyout funds, though interest from that camp has been rumored to be fading. A union representing workers at several Knight Ridder papers is also contemplating a bid for some of the papers, but the company has said it’s only interested in a sale of the entire business, and Fine has called that possibility, as well as a potential management-led buyout, a “wild card.”
Knight Ridder was forced to put itself up for sale last November after its largest shareholder, a Naples, Fla.-based investment firm called Private Capital Management, tired of poor shareholder returns and demanded action. Two other big shareholders soon seconded the call.
Many on Wall Street are looking to the outcome of the Knight Ridder process to see what new benchmark should be applied to an industry whose appeal is already low among many investors.
Even though newspapers often earn 20 cents or more on each dollar of revenue, about double the average rate of companies in the Standard & Poor’s 500 Index, the values investors are willing to assign to those stocks has been weakening due to worries about the industry.
Industry analyst John Morton says the average trading price for publicly held newspaper companies was just below eight times earnings as of the end of January, versus 11.2 times earnings two years ago.
Knight Ridder’s shares had traded as low as the low $50s last October, before the shareholder revolt became public, well below the high-$70s level they had reached in early 2004. Recently they have traded in the low $60s. That gives Knight Ridder a market value of about $4.2 billion, less than 1/60th the size of a giant like Microsoft Corp.
While newspaper companies, Knight Ridder included, remain generally quite profitable, investors are increasingly concerned that more readers and advertisers will migrate to the Internet and leave newspapers behind.
Many newspapers are taking steps to follow their readers and advertisers online, but it’s not clear that they can keep up with the onslaught of Internet advertising giants like Google Inc. Meanwhile, their costs for essentials like newsprint and employee benefits are rising quickly.
“There’s pressure on the revenues and pressure on the operating costs,” says Donald Wong, a credit rating analyst with Standard & Poor’s. “They’re all doing what they can do, but there’s a lot of uncertainty out there.”
That said, some analysts note that Knight Ridder presents an unusual set of circumstances that may not apply to other newspaper publishers, such as a presence in several challenging markets such as Philadelphia and Miami, as well as a relatively unusual single-class share structure that makes it more vulnerable to shareholder protests.
A number of other major publishing companies, while traded publicly, are controlled by family interests, including The Washington Post Co. and The New York Times Co.
What’s more, Morgan Stanley analyst Doug Arthur notes that the newspaper industry as a whole is facing what may be some general difficulties that may also pass with time, including dampened advertising demand from major advertisers such as airlines, automakers and Hollywood studios, all of which face issues of their own.
As such, Arthur doesn’t necessarily see the outcome of the Knight Ridder process as setting a new, solid benchmark for future newspaper deals, nor as a harbinger for more consolidation in the industry. “We’re in a very negative phase with the stocks right now,” Arthur said. He declined to make more specific comments as Morgan Stanley is acting as an adviser to Knight Ridder.
If no bid is accepted, Knight Ridder could pursue other options for increasing its share value, such as borrowing money to buy back a significant amount of its shares.