Clouds of uncertainty loom large over the fate of Knight Ridder, the second largest publisher of newspapers in the United States. The largest shareholder in the company that publishes 32 newspapers has demanded that the board of directors should sell it off. With the third-largest investor joining the issue, rumours and speculations are rife in the US newspaper industry about Knight Ridder being up for grabs.
Private Capital Management, Knight Ridder's largest investor, had demanded on Tuesday that the publisher should pursue a sale in light of limited revenue growth in the newspaper industry and difficulties in realising fair value. It urged the board to seek bids from financial buyers or media companies that could get cost savings and increased market presence by buying the publisher's local newspaper and online advertising assets.
Knight Ridder newspapers have a combined daily circulation of more than three million and had a turnover of $3 billion in 2004. Like many newspaper companies, however, it has been afflicted with rising costs and declining advertising revenues. It sold the Detroit Free Press earlier this year and recently announced layoffs at the Philadelphia Inquirer, the Philadelphia Daily News and the San Jose Mercury News.
Private Capital CEO Bruce Sherman said a sale should be pursued aggressively "in light of limited revenue growth across the newspaper industry and the difficulties the company has faced in realising the fair value" for its shareholders. Private Capital, a Florida investment firm owned by Legg Mason Inc, holds 18.9 per cent of Knight Ridder.
Private Capital Management is also the largest outside shareholder in the New York Times Company and has large holdings in Belo, Gannett, Media General, McClatchy, Journal Register and Lee Enterprises. With $32 billion in assets under its direction as of June 30, Private Capital was ranked by Nelson Information as the second-best money manager, based on its returns over 10 years.
In a letter to the Knight Ridder board, Private Capital said, "In our view, the actions taken to date have not adequately addressed a number of significant issues facing the company, including continuing consolidation among traditional sources of print advertising revenue; the redirection of advertising dollars to other media; the company's unexceptional operating margins; and the company's lack of a nationally read paper capable of being leveraged in the online market."
Knight Ridder, nevertheless, has been making acquisitions, including the purchase of Silicon Valley Community Newspapers, publisher of eight free weeklies in the region.
The company announced in October that its third-quarter earnings had tripled, thanks to the sale of newspapers in Detroit and Tallahassee. Without those sales, its earnings from ongoing operations dropped 40 per cent.
Harris Associates LP, the third-largest institutional investor on Thursday lend its weight to Private Capital's demand. Harris Associates, which holds an 8.15 per cent stake, said in a filing with the US Securities and Exchange Commission that it believed a purchase of the company would result in a price well above its current market value.
The second-largest investor, Southeastern Asset Management Inc, with a 8.9 per cent stake, however, said in an SEC filing the same day that its plans or proposals would depend in part on the publisher's reaction to the sale recommendation.
Knight Ridder's only reaction has so far come from spokesman Polk Laffoon who said the company's directors were always interested in the views of its stockholders. "The board takes its fiduciary duties seriously and will respond in due course," Laffoon said in a statement.
Knight Ridder's primary businesses are newspaper and Internet publishing. The company is the second-largest newspaper publisher in the United States, in terms of circulation, with 32 daily newspapers in 29 markets. Among others, it publishes Miami Herald, Philadelphia Inquirer and San Jose Mercury News. It owns more large-city newspapers than any other media company. Its newspapers have won 84 Pulitzer Prizes, including 14 Gold Medals for Meritorious Public Service.
The newspapers also have access to the offerings of the jointly owned Knight Ridder/ Tribune News Service, which distributes stories, photos, and graphics from hundreds of media contributors. Each newspaper is operated on a substantially autonomous basis by local management appointed by the corporate officers. Basic business policies are set by the corporate staff, which also provides editorial services and quality control.
Analysts see four likely scenarios: Knight Ridder ratchets up its restructuring; its sells pieces of the company; sells the whole company; or enters into a leveraged buyout.
On Wednesday, Deutsche Bank Securities upgraded its rating on Knight Ridder from "sell" to "hold". Deutsche Bank believes that other newspaper companies � primarily Gannett and Tribune � can be likely buyers rather than a private equity investor. The research firm noted that both Gannett and Tribune had the capacity to do an all-cash deal for Knight Ridder. In fact, the firm had even floated the idea of Tribune buying Knight Ridder in a "what-if" scenario in late September.
Most market watchers do not foresee a sale. A Goldman Sachs note said, "We don't view this development as the first step in the process of significant industry consolidation." Goldman Sachs maintained an "in-line" rating on Knight Ridder. Merrill Lynch, however, had a "neutral" rating. A note said, " 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. 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." Both, apart from Prudential Equity Research, have mentioned Gannett as a potential buyer.
The news has not come across as a surprise to all. Former Knight Ridder editor and now its critic, Davis Merritt, told St Petersburg Times, "If this had happened 15 years ago, I would really have been concerned that some communities would lose some truly excellent papers. But in the company's efforts to avoid this sort of thing, Knight Ridder has so degraded the quality of their papers that I'm frankly not sure it matters who owns them anymore." Merritt had worked with the company for more than 40 years. His book, Knightfall: Knight Ridder and How the Erosion of Newspaper Journalism Is Putting Democracy at Risk, was published in March.
Steve Outing analysed on the Poynter website, "The long-time rap on newspaper companies is that they haven't been willing to take big chances in the Internet space, rather taking a more slow-paced path toward converting some revenues from traditional media to Internet/digital media. I wonder if this 'shot across the bow' will be what finally gets the newspaper industry to speed up the pace of figuring out how to convert revenues to the Internet side fast enough to make up for the inevitable slide in print revenues."
The newspaper industry in the US has been beset with a number of problems: declining circulation, rising newsprint costs and increased competition from new media. Increasing pressure from investors to make more money and reverse sliding stock prices has only compounded these problems. Though stock prices of other major news companies too have fallen over the past one year (Gannett Co's stock is down 21 per cent, the Washington Post Co's is down 19 per cent, and the New York Times Co's is down 30 per cent), Knight Ridder is particularly vulnerable since 90 per cent of its revenues comes from newspaper publishing. Gannett, which publishes the largest-selling USA Today, is close behind with 89 per cent.
One would have to be extremely short-sighted not to have seen it coming. In fact, almost 10 years back, in an essay in the American Journalism Review, Philip Meyer, who holds the Knight Chair in Journalism at the University of North Carolina and had spent 23 years working for Knight Ridder, had warned: "Which scenario are we moving toward � squeezing the goose or nurturing it? While the signals are mixed, most of the decisions making business page headlines point to the squeeze scenario. Layoffs, closing bureaus, shrinking news holes are the order of the day. On the other hand, the public journalism movement represents an effort to build civic spirit in a way that will emotionally bind citizens to the newspaper. Whether very many newspapers will spend the money to wholeheartedly practice genuine public journalism remains to be seen. The short term economic pressures are against them. The first scenario produces visible and immediate rewards while the costs are hidden and distant. The second yields immediate costs and distant benefits.
"The dilemma cuts across all forms of newspaper ownership, but publicly held companies bear a special burden because of Wall Street's habit of basing value on short term return. Take the case of a long term-oriented, nurturing company like Knight-Ridder. With total average daily circulation of 3.6 million, its newspapers would bring a total of $6.5 billion if sold separately at an average value of $1,800 per paying reader. ... With 52.9 million shares outstanding at the 1994-95 high price of $61 per share, the entire company, including its non-newspaper properties, is valued by its investors at only $3.2 billion or around half the break-up value."
Ten years down the line, the prophecy seems to bear uncanny similarities to what has so far transpired and what seems to be crystallising.
