Knight Ridder Inc., under pressure from its biggest shareholders to sell itself, has begun soliciting preliminary bids from potential buyers to determine who might be interested in buying it, according to people familiar with the process.
The move does not mean the nation's second-largest newspaper group and owner of The Inquirer and Philadelphia Daily News has committed to a sale. 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 the level of interest in the marketplace.
As the San Jose, Calif., company is awaiting responses, a Wall Street analyst associated with a firm that has been hired to advise Knight Ridder in the sale issued a report dated Nov. 29 arguing that the publishing company is an attractive buy for a potential purchaser if it is willing to slash hundreds of jobs and cut $150 million to $350 million in costs.
To get to the latter figure, the Morgan Stanley analyst suggested closing the Philadelphia Daily News for a savings of $45 million. The report did not estimate how much revenue would be lost by closing the paper.
The report to investors does not necessarily reflect the advice given to Knight Ridder by Morgan Stanley's investment bankers. It does, however, go against the conventional wisdom on Wall Street that Knight Ridder may not be able to find a buyer.
Knight Ridder spokesman Polk Laffoon IV declined to comment on the report or confirm whether the company was contacting bidders. Joe Natoli, publisher of The Inquirer and Daily News, declined to comment on the analyst's scenarios for Philadelphia.
Knight Ridder has been cutting costs and personnel in many of its markets, including recent cuts of 100 jobs in Philadelphia. Further cost-cutting would likely run into criticism from unions and community groups that such cutbacks would hurt the quality of the newspapers, and lead to further declines in circulation and advertising.
Last month, Knight Ridder's largest shareholder, Private Capital Management, of Naples, Fla., demanded the company sell itself, citing the poor 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.
It is unclear how many parties have been contacted regarding the 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.
After examining the responses, Knight Ridder could invite bidders to examine more confidential financial information. Or it could use the responses to convince dissident shareholders that there is insufficient bidding interest in the company.
Knight Ridder's stock initially rose after PCM made its demand public, but has since trickled downward. Yesterday, Knight Ridder stock dropped 41 cents to close at $60.40.
In his 33-page report 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 nation's second-largest newspaper chain, which also includes the Miami Herald and San Jose Mercury News. The report concludes that Gannett Co., the nation's largest newspaper group, would be the most suitable buyer of Knight Ridder.
Arthur's research unit operates independently of Morgan Stanley's investment bank, which is advising Knight Ridder as it explores its options. Arthur said an analysis of Knight Ridder's publicly available financial information shows a buyer could make a sizable return on investment by cutting an additional 5 percent to 6 percent of costs without seriously damaging the company.
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, or 6 percent, of the company's 18,000 employees, the shutdown of the 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 5 percent of its workforce, 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.
He said Knight Ridder's one-third share of Career Builder, an online classified employment service, 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.
The report estimates that in Philadelphia, The Inquirer and Daily News will have a 2005 operating profit of $46.8 million on revenue of $519.6 million. While that profit margin is far higher than many other industries, it is lower than the margins at other Knight Ridder newspapers.
In some ways, the report is optimistic about the future, projecting increases in revenue in Philadelphia of 2.3 percent to 2.5 percent for the rest of the decade. Under one cost-cutting scenario, the authors say Philadelphia operations could achieve a 13 percent operating margin by 2009.
