PHILADELPHIA, Dec 21 (Reuters) - Now that early-stage takeover offers are in for No. 2 U.S. newspaper publisher Knight Ridder (KRI.N: Quote, Profile, Research), interested bidders are working to build alliances as the slow-moving sale process moves into its second round, according to sources close to the process.
Knight Ridder, which has a current market value of more than $4.2 bilion, has received expressions of interest from No. 1 U.S. newspaper company Gannett Co. (GCI.N: Quote, Profile, Research) and from smaller publisher McClatchy Co. (MNI.N: Quote, Profile, Research), sources said.
A partnership formed by private equity firms Blackstone Group, Providence Equity Partners and Kohlberg Kravis Roberts & Co. also logged an initial bid, the sources said, and William Dean Singleton, who runs privately held Denver publisher MediaNews Group, is also interested in making a play.
Buyout firms Texas Pacific Group, Thomas H. Lee Partners, Madison Dearborn Partners and Vestar Capital Partners are also in the running. But because of Knight Ridder's size, MediaNews and even the largest private equity firms will have to form bidding groups that are several members deep to reach the bar.
MediaNews may be tying up with Vestar and another private equity firm or two, one source said on Wednesday, though any talks on such an alliance are fluid and in their very early stages. MediaNews could also choose to work in partnership with Gannett, several sources have said, since the two are already partners in three publishing ventures involving papers in Detroit, California, Texas and New Mexico.
Based on Knight Ridder's share price of about $63 per share, sources estimated preliminary offers ranged in the mid-$60s to low $70s per share.
The process has moved along slowly in recent weeks, sources said, and little has developed since indications of interest were due on Dec. 9. Knight Ridder has scheduled management presentations to prospective bidders for the month of January, one source said, and final bids will be due some time in February.
GANNETT A LIKELY LEADER
The partnership between Blackstone, Providence and KKR could prove very strong, sources said, and MediaNews could also be competitive if it allies with solid bidding partners. But despite all the jockeying for position, some sources said Knight Ridder is Gannett's for the taking if Gannett wants it badly enough.
Gannett, the publisher of USA Today, has shown itself to be a disciplined buyer. It bid to the finish but eventually lost in the auctions of both Freedom Communications and Pulitzer Inc. Many of Gannett's papers are in smaller markets than Knight Ridder's, and one source suggested that other newspaper assets, like the regional papers being sold by British publisher Daily Mail & General Trust Plc, may be more worth Gannett's efforts.
If Gannett bought Knight Ridder, analysts say it would probably sell off certain papers or make major cost cuts to preserve results because its profit margins are stronger than Knight Ridder's.
But it's highly likely that each of the potential bidders would sell at least a few Knight Ridder newspapers to help improve results, sources said.
Some of Knight Ridder's newspapers are performing well while others, including the flagship Philadelphia Inquirer and the San Jose Mercury News, are suffering from depleted revenue and high newsprint and worker costs.
Minneapolis Star Tribune and Sacramento Bee publisher McClatchy lobbed in an early-stage bid, but sources were skeptical over whether the McClatchy family would let chief executive Gary Pruitt chase Knight Ridder too hard. They said McClatchy was not currently a front-runner in the auction.
The U.S. newspaper sector has underperformed the broader market this year, due to sluggish advertising and declines in circulation. Whether any Knight Ridder rivals are still in the running as the auction advances will depend on their willingness to double down and bet on buying more print assets instead of investing in new media channels.
In theory, newspapers are ideal investment vehicles for private equity buyers because of their recurring revenue and cash flow.
But the the firms' biggest hurdle in this case may be whether they can convince the same publishing rivals that are only moderately interested in Knight Ridder today to buy the company off their hands five years from now.
The newspaper industry isn't likely to look dramatically better at that point than it does now, one source said, so buying Knight Ridder assuming that the sector will improve significantly would be a gutsy step.
And the poor performance by Journal Communications Inc. (JRN.N: Quote, Profile, Research) since its initial public offering in Sept. 2003 doesn't bode well for the idea that Knight Ridder could be bought out now and eventually be taken public again.
