With the newspaper acquisition market shrinking in the United States, Gannett Co., the largest U.S. newspaper publisher, has reached across the Atlantic Ocean to expand its publishing empire.

The Arlington-based publisher of USA Today said yesterday that it has agreed to buy British media company Newsquest PLC for about $1.7 billion in cash and assumed debt to enter the United Kingdom's growing regional newspaper market.

Gannett will pay $7.31 in cash for each Newsquest share, a 9 percent premium to Wednesday's closing share price. Gannett executives said they have already received approval from Newsquest's two largest shareholders and executive directors representing 51.7 percent of Newsquest shares. It also will assume about $206 million of the British company's debt.

The purchase is Gannett's biggest investment outside the United States and gives it a foothold in the U.K. regional newspaper market, which is growing between 10 percent and 15 percent annually. Newsquest has been searching for a buyer for the past four months in the face of industry consolidation in the United Kingdom.

Gannett publishes 74 daily newspapers in the United States, including USA Today. Its international version of USA Today is the only paper it publishes in Europe.

Analysts said they are not surprised at Gannett's expansion abroad even though the company has focused primarily on acquisitions of small to mid-size papers in one-newspaper towns.

What the deal shows "is that acquisition prices are very high in the U.S. and low in Europe," said Mary Ann Winter, a media analyst for Brown Brothers Harriman & Co. "This is a good strategy since there is no opportunity to buy U.S. newspapers" right now.

Yesterday, Newsquest shares, which have risen more than 75 percent in the past six months, rose about 54 cents to about $7.22.

Gannett shares, on the other hand, fell $2.75 to close at $70.68 3/4.

Analysts attribute the fall in Gannett shares yesterday to the announcement of the acquisition. At the teleconference yesterday morning, Gannett executives were unable to disclose details about the deal because of U.K. regulatory restrictions, describing the acquisition only as a "good match-up."

Newsquest, a Surrey-based company founded in January 1996, has been looking for ways to expand its ad base and trim costs as the U.K. regional newspaper industry consolidates. Newsquest hired investment bankers Merrill Lynch & Co. earlier this year to seek out buyers, and Gannett's offer emerged as the highest in an auction process, said James Marsh, a media analyst at Prudential Securities Inc.

The deal is not final, however, and Newsquest could receive a rival offer in the next seven days. Gannett is paying about 10 times Newsquest's expected cash flow this year for the acquisition, Winter said, calling it "not that extravagant."

Companies in Profile

Gannett Co.

Business: Nationwide company that publishes daily newspapers and operates TV stations and cable television systems.

Based: Arlington

Employees: 39,400

1998 sales: $5.12 billion

1998 net income: $999.9 million

Yesterday's closing stock price: $70.68 3/4, down $2.75 on the NYSE

Newsquest

Business: A regional newspaper group in Britain with more than 170 newspapers.

Based: Surrey, England

Employees: 5,700 in 1998

1998 sales: $507.6 million

1998 net income: $69.4 million

Yesterday's closing stock price: $7.22*, up 54 cents on the London stock exchange

SOURCES: Hoover's, Bloomberg News

*converted to U.S. dollars