Correction to This Article
A map with a March 14 Business article incorrectly identified the State in Columbia, S.C., as a McClatchy Corp. newspaper. The paper is owned by Knight Ridder Inc. A March 14 Business article incorrectly referred to newspaper analyst John Morton as John C. Morton.

McClatchy's Paper Chase

Henry Anderson, of Santa Clara, Calif., with a copy of the San Jose Mercury News. McClatchy, which bought Knight Ridder, plans to sell off the paper.
Henry Anderson, of Santa Clara, Calif., with a copy of the San Jose Mercury News. McClatchy, which bought Knight Ridder, plans to sell off the paper. (By Tony Avelar -- Associated Press)
By Steven Levingston and Terence O'Hara
Washington Post Staff Writers
Tuesday, March 14, 2006

McClatchy Co., a family-controlled chain of mid-size newspapers, agreed yesterday to pay a bargain price of $4.5 billion for Knight Ridder Inc., a move that will dismantle the nation's second-largest newspaper company.

After a four-month auction, McClatchy emerged as the only newspaper company willing to bid on Knight Ridder, publisher of the Philadelphia Inquirer, the San Jose Mercury News, the Miami Herald and 29 other dailies. Knight Ridder, one of the best-known names in the news business, wound up on the auction block after a prolonged stock price decline sparked complaints from a major shareholder. McClatchy, a Sacramento-based publisher with 12 dailies and 17 community newspapers, has bucked many of the industry's trends in recent years with a focus on small and mid-size newspapers in growing markets.

In announcing the deal, McClatchy said it would immediately seek to sell 12 of the largest Knight Ridder daily newspapers in slower-growing areas, including the Inquirer and the Mercury News. The proposed sales sent jitters through newsrooms already familiar with rounds of layoffs.

Other newspaper chains recently sold fetched higher prices than Knight Ridder, measured as a multiple of the annual cash they generate after paying any debts. But analysts said the low price reflected a lack of confidence in Knight Ridder's management more than a statement about the health of the newspaper business. While the industry grapples with declining circulation, job cuts and stagnant advertising revenue, newspapers generally continue to enjoy fat, if flat, profit margins, analysts said.

"I don't think the gloom and doom is at all justified," newspaper analyst John C. Morton said. "Five years from now, this will look like a great deal for McClatchy."

Wall Street was not initially convinced. McClatchy's stock price slid nearly 3 percent yesterday. Gary Pruitt, chairman and chief executive of McClatchy, said in an interview that he was unconcerned about the stock-price movement, noting that when McClatchy bought the News & Observer in Raleigh, N.C., in 1995 and the Minneapolis Star Tribune in 1998, its shares flagged. "When we announced those deals, the market went down, and in the next year, we roared back," he said. "I'll take long-term gain over short-term decline."

The proposal to sell was made last year after Private Capital Management Inc., a major Knight Ridder shareholder, expressed concern about the company's fortunes and its management. Private Capital Management is also a major shareholder of McClatchy, but Pruitt said it supports the deal. "I don't anticipate a problem there," he said. "Of course, we'll have to deliver and we understand that."

Under the deal, Tony Ridder, chairman and chief executive of Knight Ridder, stands to collect $67 million on about 1 million shares of company stock he owns, including options. If he is terminated after the merger, he'll also get three times his annual salary and bonus, or more than $5 million.

Still up in the air are the 12 metropolitan dailies that don't fit with McClatchy's strategy. Larry Grimes, president of W.B. Grimes & Co., a Gaithersburg investment-banking firm that focuses on the media industry, predicted that McClatchy may get higher prices, as a multiple of cash flow, for these newspapers than it paid for all of Knight Ridder's portfolio.

Knight Ridder sold for 9.5 times free cash flow, making the purchase price, on a cash-flow basis, cheaper than any other major newspaper deal of the past five years. Recent deals have priced newspapers at 12 to 14 times their free cash flow.

"It may be the case here that Knight Ridder's parts are more valuable than the sum of the parts," Grimes said.

Besides San Jose and the morning and evening newspapers in Philadelphia, McClatchy plans to sell dailies in Akron, Ohio; Aberdeen, S.D.; Grand Forks, N.D.; Fort Wayne, Ind.; Contra Costa County in California; Monterey, Calif.; Wilkes-Barre, Pa., and Duluth, Minn. McClatchy will also sell, for antitrust reasons, the St. Paul Pioneer Press, which competes directly with McClatchy's Minneapolis Star Tribune.

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