NEW YORK: Deutsche Bank Securities upgraded its rating on Knight Ridder Wednesday from "sell" to "hold" based on Tuesday's news that Knight Ridder's largest shareholder, Private Capital Management (PCM), is pushing for a sale of the company. The firm's analysts think the probability of a transaction is "high."
Additionally, the research firm expects other major shareholders -- including Southeastern Asset Management (which holds a 9% stake as of Q2) and Harris (which holds an 8% stake as of Q2) -- to follow PCM's lead.
Wednesday's decision comes just two days after Deutsche Bank downgraded Knight Ridder from "hold" to "sell" due to worries about 2006 ad-revenue growth.
Earlier, Goldman Sachs, Merrill Lynch, and several other research firms concluded that the likelihood of Knight Ridder finding a buyer was, in fact, low.
If Knight Ridder goes on the block, Deutsche Bank thinks other newspaper companies -- notably Gannett and Tribune -- would be likely buyers rather than a private equity investor. (The research firm floated the idea of Tribune buying Knight Ridder in a "what-if" scenario in late September). The firm notes that both Gannett and Tribune have the capacity to do an all-cash deal for Knight Ridder.
"We think Gannett is a more likely suitor than Tribune, though in our view the strategic fit is better with Tribune," said the note.
The reason: "Tribune has no choice but to be a large market newspaper operator. ... The winning strategy for them may be to concentrate resources on developing a viable long-term growth strategy for the large market newspapers, and a component of that probably needs to be the creation of a truly integrated national advertising buy."
When Deutsche Bank does the math on a hypothetical Tribune/Knight Ridder deal, the combined company would have papers in 15 of the top 31 markets, with one in each of the top four markets, with a circulation in excess of 6 million.
As of 2 p.m. Wednesday, Knight Ridder shares were trading up $1.06 to $59.06. Tribune was trading up $.94 to $32.41, and Gannett was trading up $1.39 to $64.75.
