Knight Ridder, under pressure from three major shareholders to sell the San Jose company, has begun soliciting preliminary bids from potential purchasers in an attempt to determine who might be interested in buying it, and how much they'd be willing to pay, according to sources familiar with the process.
The move does not mean the nation's second-largest newspaper group and owner of The Monterey County Herald has committed to selling itself. Instead, the request for bidders to submit what is commonly called an ''expression of interest'' is the next step in a process to more firmly establish Knight Ridder's appeal to the marketplace.
As the company waits for responses, a Wall Street analyst issued a report Wednesday arguing that Knight Ridder is an attractive buy for a potential purchaser if it is willing to slash hundreds of jobs and cut $150 million to $350 million from the company. The report goes against the growing conventional wisdom on Wall Street that Knight Ridder may not be able to find a buyer. The report is the most detailed estimate of the company's finances on record.
Knight Ridder spokesman Polk Laffoon declined to comment on the report or confirm whether the company was contacting bidders.
Last month, Knight Ridder's three largest shareholders, led by Private Capital Management of Naples, Fla., demanded that the company sell itself, citing the performance of its stock. Since then, Knight Ridder has confirmed it is working with Goldman Sachs and Morgan Stanley to explore a variety of options, including a potential sale.
It's unclear how many parties have been contacted regarding a sale or what the deadline is for responding. Submitting such an expression is usually nonbinding and includes general information, such as a party's ability to finance a bid and possible values it would consider.
Such a response is usually required as a condition for a potential bidder to receive more detailed internal financial information from a company considering a sale. The company could also use the responses to convince dissident shareholders that there is insufficient bidding interest in the company.
Wall Street has been skeptical a buyer would emerge. And that view has been reflected by Knight Ridder's stock price, which initially rose after PCM made it's demand public, but has since trickled downward. On Wednesday, its stock dropped 41 cents to close at $60.40.
But in a 33-page note to clients, Morgan Stanley newspaper analyst Douglas Arthur tried to dispel the buzz on Wall Street that there may not be many parties interested in buying the company.
Arthur's research unit operates independently of Morgan Stanley's investment bank. The research report was issued to Morgan Stanley's investor clients. He said an extensive analysis of Knight Ridder's publicly available financial information shows a buyer could make a sizable return on its investment by cutting another 5 to 6 percent of costs.
The analysis says that the cost of running Knight Ridder's newspapers and digital media operations could be trimmed by as much as $350 million under a ''scorched earth'' reduction of 1,064 of the company's 18,000 employees, the shutdown of the Philadelphia Daily News and heavy cuts at corporate headquarters and Knight Ridder Digital.
Even under a ''medium scenario,'' he said $150 million in costs could be trimmed by eliminating five percent of its work force, or 887 employees, cutting corporate expenses and realizing other savings.
The biggest challenge for any potential buyer, Arthur notes, is figuring out what to do with the poorest-performing Knight Ridder newspapers: The Philadelphia Inquirer and Daily News, the San Jose Mercury News and the St. Paul Pioneer Press.
Arthur estimates the Mercury News is currently producing an 8.0 percent profit margin, compared to Knight Ridder's overall 19.4 percent margin in 2004.
Mercury News publisher George Riggs declined to confirm Arthur's estimate.
Arthur said Knight Ridder's one-third share of CareerBuilder, an online classified employment service co-owned with Gannett and Tribune, could be worth $2 billion in five years and ''may be the single most valuable asset of the company.'' If Gannett were to buy Knight Ridder, it would ultimately own two-thirds of a $6 billion asset, he said.
On Wednesday, Knight Ridder Chairman and Chief Executive Officer Tony Ridder sent an e-mail to all employees thanking them for their hard work while the company tries to address the situation with shareholders. Ridder defended the financial performance of the company, which he said was favorable when compared to competitors. He said he believed PCM was targeting the company solely because its single-class stock structure left it more vulnerable to outside pressure than other newspaper companies.
''The issue for our largest shareholders -- led by our single largest shareholder, Private Capital Management -- goes beyond our journalistic and financial performance. It is to show strongly positive results in their investment portfolios,'' Ridder said. ''We have a proud history. The legacy of that history is some of the finest regional and community mastheads in America. As standard-bearers of that legacy, we are charged with its preservation.''
Contact Chris O'Brien at cobrien@mercurynews.com or (415) 477-2504 or Pete Carey at pcarey@mercurynews.com or (408) 920-5419
