March 13, 2006: McClatchy acquires Knight-Ridder

Knight Ridder Inc., the owner of the St. Paul Pioneer Press, agreed Sunday night to sell itself for about $4.5 billion in cash and stock to the McClatchy Co., the parent of the Star Tribune, according to news reports.

The deal, which is expected to be announced today, throws into doubt the future of daily newspaper competition in the Twin Cities. McClatchy could operate the Pioneer Press, shut it down or try to sell it off to another company - and U.S. antitrust officials could have a voice in that decision.

The deal also comes as the newspaper industry is gripped by uncertainty as readers across the country have begun to drift away from printed newspapers.

Analysts said they expect the company to sell Knight Ridder newspapers that don’t fit McClatchy’s traditional focus on high-growth markets and are not located near any of its existing newspapers.

Sacramento, Calif.-based McClatchy, which in addition to the Star Tribune publishes the Sacramento Bee and other papers, was the only major newspaper company to submit a final bid for Knight Ridder, publisher of 32 daily newspapers.

Knight Ridder’s holdings include such venerable papers as the Pioneer Press, the Miami Herald, the Philadelphia Inquirer and the San Jose (Calif.) Mercury News. While it attracted interest from some big publishers, including Gannett, the largest chain in the United States, most major newspaper companies such as the Washington Post Co., the Tribune Co. and Dow Jones, passed on the auction entirely.

Reported terms of the deal

Under the terms of the deal, McClatchy agreed to pay about $67 a share in cash and stock for Knight Ridder, the New York Times and San Jose Mercury News reported. About 60 percent of the payment will be in cash, while the rest will be in McClatchy shares. The Wall Street Journal, in a report posted on its website late Sunday, put the price at about $67.50 a share.

Messages left by the Associated Press with spokespeople for Knight Ridder and McClatchy were not immediately returned Sunday night.

Because Knight Ridder is so much bigger than McClatchy, the merger is likely to create some upheaval for both companies. McClatchy could sell or close some of the Knight Ridder papers and could take further cost-control measures in its own newsrooms to help finance the deal.

Knight Ridder, based in San Jose, has almost three times as many dailies as the 12 owned by McClatchy. Knight Ridder’s $3 billion in revenue for 2005 was more than twice McClatchy’s $1.2 billion.

“McClatchy is a dolphin swallowing a small whale,” said Chuck Richard, an analyst at Outsell Inc., a research firm for the information industry.

McClatchy has one of the strongest track records in the newspaper business, both for award-winning journalism in its generally small- and medium-circulation categories, and financially. The industry has faced declining circulation and falling stock prices during the past several years, but McClatchy, through the end of 2004, boasted 20 consecutive years of circulation increases and 10 consecutive years in which its stock grew at the highest growth rate of any newspaper stock.

McClatchy’s gains have slowed in recent months as it faces the same challenges other newspapers face, although analysts said that its disciplined management had put it in a stronger position than many.

McClatchy’s operating profit margin was 22.8 percent last year, compared with Knight Ridder’s 16.4 percent.

Some papers could be a drag

While the Knight Ridder papers are profitable, some are more troubled than others and could be a drag on McClatchy’s bottom line. Analysts speculate that the company could shut down the Philadelphia Daily News and possibly sell the Inquirer, since the business climate in Philadelphia is sluggish and the papers face tough competition from a ring of suburban dailies. On the other hand, they say, the Inquirer generates a lot of cash, something McClatchy will need as it goes into debt to pay for Knight Ridder.

Analysts also have suggested that McClatchy might sell the Pioneer Press. The Pioneer Press’ profit margin is just 10 percent, relatively low for the industry, and selling it would also help McClatchy raise money to pay for the deal.

Analysts also expect McClatchy to save on costs by consolidating some of its state and national news operations as well as advertising sales with Knight Ridder. For example, it could easily absorb the San Jose paper into its string of northern California papers, and merge operations at its News & Observer in Raleigh, N.C., with Knight Ridder’s Charlotte Observer.

Exit for CEO Tony Ridder

The sale of Knight Ridder - precipitated by a large shareholder angry at the stock’s performance - will close a chapter for the company’s chairman and CEO, Tony Ridder. (That shareholder, money manager Bruce Sherman, holds 12.2 million shares acquired for an average price of just over $65 a share.)

“It’s a sad way for Tony to have to end his career,” said Ross Jones, who served as chief financial officer under Ridder for seven years before retiring in 2000. “I know that this just kills him.”

Upon completion of the sale, the 65-year-old Ridder stands to collect millions. He beneficially owns 1.44 million Knight Ridder shares, including 530,000 that are in a family limited partnership of which he is general partner. At current prices, those shares are valued at about $94 million.

In addition, Ridder, along with other Knight Ridder executives, benefits from an “income security agreement” with the company. Under that plan he would, in the event the company is sold, be entitled to a lump-sum cash payment equal to roughly three times his total annual compensation, plus other benefits. In 2004, Ridder received salary and bonus of $1.7 million.

During a decade at Knight Ridder’s helm, Ridder turned a company known for its big-city papers into a chain of cost-conscious publications. Despite his efforts, Knight Ridder’s stock price began to fall about two years ago as what first appeared to be a cyclical downturn in the newspaper industry began to look like a secular shift.

By November 2005, Sherman, the money manager, had seen enough. Sherman’s firm, Private Capital Management, of Naples, Fla., holds 18 percent of Knight Ridder stock and is its largest shareholder. In a letter to Knight Ridder’s directors, he demanded that the company put itself up for sale. In his letter, Sherman cited limited revenue growth in the newspaper industry and “the difficulties the company has faced in realizing the fair value of the company for its shareholders.”

Two weeks later, on Nov. 14, Knight Ridder’s board acceded to his demand.

The New York Times and Wall Street Journal contributed to this report.