Newspapers May Get Look At Future if Knight Sells

The possible sale of Knight Ridder Inc., publisher of the Philadelphia Inquirer, Miami Herald and 30 other daily newspapers, is shaping up as a glimpse into the future of the newspaper industry.

Bids for the company were expected this week and will reveal investors' perceptions of the health of an industry uncomfortably straddling the old world of print journalism and the new, quickly evolving world of the Internet.

"However it plays out, it will tell us how the industry itself will be valued," said James Peters, an equity analyst with Standard & Poor's Corp. in New York.

An announcement of any sale isn't likely at least through the weekend, said a person familiar with the process, who spoke on condition of anonymity because of the sensitivity of the discussions.

Possible bidders include McClatchy Co., a Sacramento-based publisher with 12 dailies and 17 community newspapers; MediaNews Group Inc., a private Denver-based newspaper chain; and Gannett Co., the nation's largest newspaper publisher. A few private equity firms were reported to be considering bids, but some analysts said the enthusiasm of those firms may have waned.

Analysts predict that bids will be in the mid-$60s-a-share range, pricing Knight Ridder at only a slight premium over its Thursday close of $62.66. Offers in that range aren't likely to sweep other newspaper company stock prices higher, said Lauren Rich Fine, newspaper analyst at Merrill Lynch & Co. "The bids will tell people there isn't general conviction about the industry as a whole," she said in an interview.

Symbolic of the woes afflicting the newspaper business, Knight Ridder put itself up for sale in November in response to pressure from shareholders to lift its stock price. Like other publishers, Knight Ridder has battled rising newsprint prices and falling circulation. Readers in recent years have migrated to other media for news, including the Internet.

To offset stagnant advertising revenue, newspapers have trimmed jobs. In September, the Inquirer announced a buyout of 15 percent of its newsroom staff; the same day, the New York Times said it would cut 45 newsroom positions as part of a plan to eliminate 500 jobs at the company.

Knight Ridder was put on the block after a major investor, Private Capital Management Inc., criticized management. Some analysts believe that the Knight Ridder solution, to sell the company, isn't likely to play out across the industry. Merrill Lynch's Fine said in a report that she didn't believe the likely price range for Knight Ridder "will cause any companies to rush out and sell."

After putting itself up for sale, Knight Ridder got a slight bump in its stock price, but the shares have traded mostly in a narrow range near their current level. Private Capital Management has since trimmed its investment in Knight Ridder and in other newspaper companies, reflecting the mood of large investors weary of the sluggish performance of the publishers' stock prices. "That told me that they believed it was prudent to take at least some of their money off the table," S&P's Peters said.

Though bids for Knight Ridder may not hit the higher estimates of $70 per share, analysts still believe the newspaper business remains attractive to some investors. Bidders for Knight Ridder are likely to be other newspaper companies rather than private equity firms because publishers can more easily benefit from synergies between operations.

"There are companies that are interested in owning more newspapers -- companies that still have confidence in the future of the newspaper business," said John Morton, a newspaper analyst and president of Morton Research Inc., a media consulting firm in Silver Spring.

But key to the future valuation of newspapers is how fully and swiftly they embrace the Internet, said Colby Atwood, vice president of Borrell Associates Inc., a media research and consulting firm. He believes the bids for Knight Ridder carry an implicit judgment on progress in adapting to the Internet age.

"The valuation of a newspaper company will be increasingly influenced by the strength of its online operations," he said. "Because valuations are forward-looking, companies positioned for strong future earnings from online operations will enhance value to potential investors."

Atwood said revenue from newspapers' Web sites is rapidly growing as a percentage of the total revenue from newspaper operations.

Revenue from Knight Ridder's online operations rose in 2005 to an estimated 5.8 percent of the company's total for newspaper operations, Atwood said. In 2001, it was 1.4 percent. Similarly, McClatchy's online revenue over the same period rose to an estimated 4.5 percent of newspaper operations' total from 1.5 percent.

"The tail is starting to wag the dog in terms of online operations becoming more important to newspaper companies," Atwood said.

For James Naughton, former executive editor of the Philadelphia Inquirer, the outcome of the bidding process will be a referendum on another element of a newspaper company's valuation: its commitment to quality journalism. Naughton said that in recent years Knight Ridder has pared its news operations in an intensive drive to satisfy shareholders. He fears that an acquiring company would push cost-cutting even further, impairing Knight Ridder newsrooms as they try to deliver good journalism.

In his eyes, one of the potential bidders poses the best chance of maintaining the company's journalistic value. "If you were to ask the veterans of Knight Ridder, the most optimistic outcome would be for Knight Ridder to be acquired by McClatchy," Naughton said. "McClatchy has managed to produce quality journalism without somehow offending Wall Street."