Does dollars-6.5bn US takeover signal future for UK press? DEAL OF

0 Comments | Sunday Herald, The, Mar 19, 2006 | by Steven Vass

CALIFORNIA may be the land of permanent summer, but a dollars- 6.5 billion (pounds-3.7bn) deal between two newspaper groups based in the US state gave a somewhat chilly endorsement of the US newspaper publishing sector last week.

Sacramento-based McClatchy Co's deal to buy Knight Ridder creates the second largest newspaper group in the country, after Virginia- based Gannett, which owns the Sunday Herald. It also bolts on a number of newspaper websites and a one-third stake in the US jobs site CareerBuilder. com.

The deal ends five months of uncertainty for San Jose-based Knight Ridder, which publishes titles including San Jose Mercury News, Philadelphia Inquirer and The Miami Herald. It follows demands last November from major shareholders led by Bruce S Sherman of hedge fund Private Capital Management that the company be sold to unlock value.

This forced chairman and chief executive P Anthony Ridder to sell or face being ousted from the family firm. It also sees the Knight Ridder name disappear after more than 100 years for a price well under the industry average - a development that will have been watched closely by newspaper executives on both sides of the Atlantic.

While the last big deal in US newspapers saw Pulitzer sold to Lee Enterprises at 13.5 times earnings just over a year ago, Knight Ridder has gone for a multiple of around 9.5. The news that all but one of the publicly traded newspaper stocks in the US lost value when it was announced last Monday suggests Wall Street was not too impressed either.

The muted response to the deal was not helped by the fact that McClatchy is thought to have been the only trade bidder for the 32 daily titles after a rumoured joint bid from Gannett and MediaNews Group was abandoned.

There were thought to have been several bids from private-equity groups, headed respectively by Thomas H. Lee Partners and Kohlberg Kravis Roberts, but the sums offered have not been disclosed.

With newspapers in the US plagued by falling circulations and ad revenues in a similar vein to their UK counterparts, the deal raises questions about whether the industry is being permanently downgraded because of the challenge posed by the internet.

Last week, media mogul Rupert Murdoch again emphasised that any publisher who fails to provide content through a range of new media would face extinction. US publishers have already been hit by the giddy rise of craigslist, a nationwide classified ads site. In the UK, companies such as Johnston Press and Trinity Mirror have both stressed that recent poor advertising results were not caused by advertising moving online, but the arrival of sites such as craigslist over the next few years could add to the pressure.

Lorna Tilbian, media analyst at London-based Numis Securities, cautioned against direct comparisons, but said:

"Whatever happens in America sooner or later travels here."

In the US, observers emphasise that there is a mixed picture in newspapers.

Edward Atorino, media analyst at Benchmark Capital in New York, says:

"The Knight Ridder deal does say that this wasn't like an internet company where there would be 30 bidders.

"It recognises what has been a devaluation in newspaper shares over the past three or four years due to the slow down in growth. On the other hand, it does suggest that the bears who said nobody's interested and that newspapers were dying were overstating it."

He adds that McClatchy still has confidence in the industry and that the internet is not the main problem. "There's been consolidation in some of the key advertising categories such as telecoms and retail. That is far more important as a reason for the slowdown than handy explanations like the internet."

The question now is what will happen to the 12 Knight Ridder titles that McClatchy has decided do not fit its strategy of focusing on fast-growing markets where there is no competition.

These include the San Jose Mercury News, The Philadelphia Inquirer and The Beacon Journal, which serves Akron, Ohio. They generate about 45-per cent of Knight Ridder's revenue.

Atorino senses a fair amount of interest in the titles, all of which are profitable. US journalists' union, the Newspaper Guild, has expressed an interest in buying at least eight of them.

Gannett, Hearst Corporation and MediaNews Group are all being touted;

and there are expressions of interest from individuals for single titles.

Tilbian points to one other way in which the deal is relevant to the UK. The fact that Harris Associates, the Chicago-based equity house, was one of the shareholders who publicly pressurised Knight Ridder to break itself up, will not have gone unnoticed at Trinity Mirror, owners of the Daily Mirror and Daily Record/Sunday Mail.

Harris has been building up a large stake in the UK company in recent months, and speculation about its future intensified after Tweedy Browne, another US investment house, called for it to split its regional and national titles into two companies. This event is being seen as increasingly likely after Trinity Mirror's chairman Victor Blank retires in May. He was instrumental in the original merger.