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US: Players Big and Small Are Sifting Through Pieces of Knight Ridder

by Katharine Q. SeelyeThe New York Times
March 27th, 2006

With the McClatchy Company set to accept bids, starting as early as tomorrow, for the 12 Knight Ridder papers it is selling, some of the potential buyers are looking at the country as if it were a giant chessboard.

The goal is not to topple a king but to become one a king of each regional market where potential buyers already own newspapers and can achieve economies of scale by buying pieces of Knight Ridder.

"It's a delicate game of strategy right now," said Thomas Russo, a partner at Gardner Russo & Gardner, a capital management firm in Lancaster, Pa.

The sales are likely to lead to a further consolidation of the newspaper industry around the country. During the last decade or so, newspapers have been "clustering," that is, buying papers near one another, allowing them to save money by combining their advertising sales and printing operations and, in some cases, their news divisions.

Analysts said that clustering was a major motivation for many of the newspaper companies that are now interested in pieces of Knight Ridder. To achieve their ends, these companies could go into partnerships or even swap other papers.

According to analysts, the newspaper companies that are potential buyers include the following:

* The MediaNews Group, Dean Singleton's company, which already owns nearly two dozen papers in California and will almost certainly be interested in at least 3 of the 12 Knight Ridder papers: The San Jose Mercury News, The Contra Costa Times and The Herald of Monterey County.

* Gannett, the nation's biggest newspaper publisher with operations in 41 states, including Indiana and Ohio, which may want The News-Sentinel in Fort Wayne, Ind., and The Akron Beacon Journal.

* Lee Enterprises, which owns dailies in the Midwest and could be looking at The Pioneer Press in St. Paul as well as The Duluth News Tribune, The Aberdeen American News in South Dakota and The Grand Forks Herald in North Dakota.

* Forum Communications of Fargo, N.D., which may also be interested in the papers in Aberdeen, Fort Wayne and Duluth.

A single company buyer is less obvious for the two Knight Ridder papers in Philadelphia, The Inquirer and The Daily News. Gannett owns The News Journal in Wilmington, Del., and The Courier-Post in nearby Cherry Hill, N.J. At the same time, Mr. Singleton has a reputation for being attracted to bigger newspapers in difficult markets.

Finally, there is The Times Leader in Wilkes-Barre, Pa., which has direct competition. The paper reported yesterday that Times-Shamrock, which owns The Times Leader's competitor, The Citizens' Voice, would be a logical suitor but that if Times-Shamrock did buy the paper, it would probably have to close one because of antitrust concerns.

One suitor Yucaipa Companies, a private equity firm working with the Newspaper Guild, which represents employees at many of the 12 papers is interested in buying all 12. Yucaipa, which says it will make a bid tomorrow, has been in a dispute with McClatchy over getting all the information that it says it needs to make an informed bid.

Yucaipa is not the only bidder lacking financial information. McClatchy issued a statement yesterday saying that it had not provided such information to any of the "dozens of parties" who have contacted McClatchy since the company won the bidding for Knight Ridder and put 12 of its papers on the market.

Local investors in several of the 12 cities have emerged as possible buyers for papers in their own markets. But McClatchy said that the only potential buyers to receive information so far were those that had signed nondisclosure forms leading up to the bidding for all of Knight Ridder, and that McClatchy had given them nothing further. This could complicate the process for some.

"It takes the market some time to get to know each paper as an individual entity," said Susan Casey, an investment banker at Houlihan Lokey Howard & Zukin, based in Los Angeles.

It also puts newspaper companies like MediaNews and Gannett at a distinct advantage, because they were the only ones big enough to pursue Knight Ridder when it was intact. On March 13, McClatchy agreed to buy Knight Ridder for about $4.5 billion in cash and stock.

Analysts have estimated the total value of the 12 papers at more than $1.4 billion and said the publications could probably bring a higher price individually or in small bundles than as a whole.

Gary B. Pruitt, chairman and chief executive of McClatchy, said in an interview that he remained open to all bids, whether for a single paper or all 12. He said he expected the bidding to continue beyond tomorrow and that he would announce each deal as it was completed, with the goal of selling all the papers by the time he closes on Knight Ridder sometime this summer.

"As we strike the final definitive agreements," Mr. Pruitt said, "we would prefer to announce them so that we can end the uncertainty for those employees and also let Wall Street know we're getting this done."

Mr. Pruitt himself is still selling his own deal to Wall Street. He plans to be in New York this week to talk to Standard & Poor's and Moody's, the ratings agencies, which are assessing McClatchy's creditworthiness after it took on additional debt to buy Knight Ridder, the nation's second-biggest newspaper company. Wall Street's reaction so far has been tepid, with McClatchy stock dipping nearly 10 percent since the deal was announced.

Mr. Pruitt said that McClatchy was not spending any money on a new headquarters to accommodate its larger place in the media universe. McClatchy's corporate offices occupy a small area on the second floor of the low-rise brick home of The Sacramento Bee, located in a neighborhood of houses and small businesses. It is a far cry from the gleaming office tower that Knight Ridder began leasing in San Jose, Calif., a few years ago.

"We'll add people to corporate, but tens of people, not hundreds," Mr. Pruitt said. "We don't have a big corporate staff, and we don't feel we need a big fancy building. That's not McClatchy's style."

Analysts said that newspaper companies in particular were looking at how they could add Knight Ridder papers to their clusters without violating antitrust rules.

Craig A. Dubow, president and chief executive of Gannett, told analysts at a meeting in New York last week that Gannett, which owns television stations in some markets where Knight Ridder had newspapers, had been interested in Knight Ridder but did not bid for it partly because of antitrust and cross-ownership concerns.

"We had a number of markets that were in direct conflict," he said, according to a company Webcast of the meeting.

As for the coming round, he said, Gannett was looking for "positive synergies."

A spokeswoman for the Justice Department said that because of its sheer size, the acquisition of Knight Ridder by McClatchy "is something we would be interested in looking at."

But the department has not scrutinized a newspaper merger since 2000, in San Francisco. The absence of action raises questions about where clustering ends and monopolies begin.

"Since 2000, the antitrust division has taken a pass on legitimate newspaper consolidation and restructuring," said Stephen Calkins, who teaches law at Wayne State University and specializes in antitrust. "In part this reflects the absence of proposed mega-mergers. But it also reflects the division's perception of competition in the Internet age, and the division's focus on price and output without regard to editorial diversity."

The department was silent, for example, on an unusual deal last year in Detroit: Gannett sold The Detroit News to Mr. Singleton and bought the larger Detroit Free Press from Knight Ridder. The deal allowed Knight Ridder to exit the troubled Detroit market and allowed Gannett and Mr. Singleton to enter into a profit-sharing relationship, their third.

The deal gave Gannett a 95 percent controlling interest in joint operations in Detroit, and just the year before the company bought papers in the Detroit suburbs.

"Is Justice interested in watching?" asked Kurt Luedtke, the former editor of The Detroit Free Press. "If it is, why did it do nothing in Detroit? And if it isn't, do all the players know this?"

As of last year, only 45 cities in the United States had more than one daily newspaper, according to The Editor & Publisher International Yearbook. These include 12 with joint operating agreements aimed at allowing both papers to survive while avoiding antitrust challenges.

"The antitrust people never seemed to catch on that suburban monopolies act in the way that urban monopolies do," said John McManus, director of GradetheNews.org, at the School of Journalism and Mass Communications at San Jose State University.

He said that if Mr. Singleton bought The San Jose Mercury, for example, it would be comparable to one person's owning all the grocery stores around San Francisco, "and there would be no reason for them to compete on either price or quality."



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