NEW YORK: The news that Knight Ridder's largest shareholder, Private Capital Management (PCM), sent a letter to the board urging a sale of the company set off rampant speculation in the industry. While the stocks enjoyed a rally on the news of a potential takeover (similar to the Dow Jones rumor), most analysts weighing in think the sale of Knight Ridder is unlikely.
Goldman Sachs is staying on the sidelines. "We don't view this development as the first step in the process of significant industry consolidation," said a note.
Goldman also sheds some light on PCM, calling it "a highly successful money management firm" which has traditionally "followed a value-oriented style." PCM is no stranger to newspapers and furthermore, their investment strategy relies on a close relationship with management.
As of June 20, 2005, PCM had about 14% of its portfolio invested in newspaper stocks, according to Goldman. For the same time period, it owns approximately 37.1% of McClatchy, 25.6% of Belo, 22.5% of Lee Enterprises, 18.2% of Media General, 14.6% of The New York Times Co., 12% of Journal Register, 5.8% of Gannett, and 0.7% of Tribune.
Goldman makes the interesting remark that based on their conversations with newspaper executives, it seems that PCM has taken "a very passive approach to its newspaper investments." And furthermore, analysts question PCM's strategy with its holdings in the newspapers, since the underperformance of the sector is weighing down PCM.
Out of the nine newspaper companies that PCM owns stock in, many are "virtually take-over proof" due to family controlling interests and the super-voting class of shares. Gannett, Knight Ridder, Tribune, and Journal Register are most vulnerable.
Regarding Knight Ridder, Goldman thinks there are limited buyers out there for the San Jose, Calif.-based company. Still, analysts speculate that Gannett and McClatchy would be the two most likely "strategic buyers."
Goldman Sachs maintains its "in-line" rating on Knight Ridder.
Merrill Lynch brings up Gannett and Tribune but is quick to say that the new CEO at Gannett and no clarification of cross ownership rules would probably cool any interest.
"All newspaper executives are faced with challenges today so it's not obvious to us that, even at the right price, [that] buying more newspapers makes sense," said Merrill. "Arguably, if a strong case could be made that the market has overblown the secular concerns, a strategic buyer could have a once in a lifetime opportunity, but we could not condone that point of view."
Merrill Lynch maintains its "neutral" rating on Knight Ridder.
Prudential Equity Research has pretty much the same view. "We see few, if any, potential buyers," said the note. Gannett, Knight Ridder, the New York Times, McClatchy, and maybe even News Corp. would be potential suitors that could handle the transaction. More likely though, if anyone is going to do some acquiring, said the note, it's mostly likely a financial buyer [and that's unlikely].
Out of all the newspaper companies, "Gannett would be the most probable candidate," Prudential said, before adding that the company would run into cross-ownership problems. And for Tribune, well, the company "has yet to fully digest the Times Mirror acquisition."
Prudential maintains its "neutral" rating on Knight Ridder.
Bear Stearns said that a "sale is not a given" because Knight Ridder is a pure play newspaper company with below-average margins. It maintains its "peer perform" rating on the company.
