What a difference a week makes. One week ago, McClatchy was emerging as the successful bidder in the Knight Ridder auction. Late Sunday, the white smoke emerged with the news that McClatchy had indeed won KR’s 32 dailies, at a not-bad-considering price of $67.25 per share, or $4.5 billion plus $2 billion in debt. It further emerged that the deal was 60 percent cash/40 percent stocks. This week, the print world, its analysts, and some of its reading customers have tried to make sense of the twisting and turning deal, which is reshaping the map of U.S. newspaper ownership. Outsell believes that a fundamental revaluing of newspaper properties is a clear result of the deal. The KR sale price is a little bit north of 10x EBITDA, a far cry from the almost 13x Lee paid for Pulitzer 14 months ago.
In Outsell’s opinion, the increasing uncertainties of market share and future revenue streams have caught up with news publishers. Those valuation questions will be further tested immediately. As the ink on the deal was barely dry, 12 of the KR papers – including flagships in Philadelphia (the Inquirer) and San Jose (the Mercury News) – learned that their buyer was putting them on the block. It was a rude interruption of their celebration. (Their surprise was shared by KR CEO Tony Ridder, who told the Mercury News that he was shocked that his hometown paper and 11 others would not remain in McClatchy’s fold.) The reason was clear: CEO Gary Pruitt had made good on his read-my-lips promise to his shareholders. As the KR auction moved forward, he told them that McClatchy would not waver from its relatively successful strategy of buying higher-margin properties in higher-growth markets. Philadelphia, San Jose, and others didn’t meet that standard. Not said but very much an issue: most of the 12 have unions, making cost savings more difficult and time-consuming to achieve. As Pruitt went on a whirlwind goodwill tour of media and analysts, he made the point that he wanted the deed done quickly. The 12 papers – currently producing 42 percent of KR’s revenues – were to be ready to be transferred to their eventual owners on July 1, when he takes ownership of KR. In Outsell’s opinion, Pruitt’s urgency makes sense. McClatchy is in the throes of all the same issues as its brethren companies. Those issues center on the disruptive effects of the Internet, as readers become online users and advertisers move to the seductive allures of measurable online reach. In fact, before Pruitt gets to his next stage of the familiar Innovator’s Dilemma – transitioning a successful old business into new territory – he must first resolve the Remodeler’s Dilemma. That is, how to put quickly in order the newly enlarged House of McClatchy, so he can get on with the business of the future. He’s got to be mindful of Tribune’s experience with its 2000 purchase of Times Mirror, an integration that most agree has sapped way too much of the acquiring company’s core energies.
McClatchy Interactive head Chris Hendricks made a quick trip this week from Sacramento to Knight Ridder Digital in San Jose. He offered his own brand of optimism, deferring most integration questions as premature. Hendricks estimated that Internet operations consolidation would save $15 million. Critical to McClatchy’s plans and the future of newspaper-owned online classifieds sites is what happens with CareerBuilder, the crown jewel of newspaper-owned properties. It has gained about one-third of the highly profitable online recruitment market for its equal-share owners - Tribune, Gannett and Knight Ridder. Though Tribune and Gannett can buy out KR’s share now, Pruitt made the case loudly that he wants to take over the KR share and that by bringing all the current McClatchy papers into the fold, it would only be stronger. Allowing McClatchy to assume KR’s share would mean CareerBuilder will have a greater market presence. Leaving McClatchy in the cold would be another signal of newspaper industry fragmentation. The CareerBuilder puzzle is just one of many about how KR’s prized and honored operations will be sorted out:
- Classified Ventures: This auto/apartments set of products is already affiliated with McClatchy’s papers, but not as an owner. The resolution of KR’s ownership here should parallel Career Builder’s – more newspaper company cooperation or more fragmentation.
- Knight Ridder’s Washington Bureau: This has done some of the best and most original work covering the Bush Administration and the Iraq War. McClatchy could take on a national/global news presence or decide it’s too expensive, leaving the field to AP, Reuters, the Times, and a few others.
- Knight Ridder Tribune Newswire: KRT is the leading features/photo/graphics supplementary wire to AP. Tribune may not rationalize its L.A. Times/Washington Post wire relationship. Or again, McClatchy could assume KR’s position, further positioning itself as the new quality chain – but without the baggage.
McClatchy’s sales price may adjust with market conditions. The 40 percent of the price that will be paid in McClatchy stock is subject to McClatchy share price fluctuation – there is no “collar” to adjust the sales price should the share value fall. That value has fallen since the announcement – and with it KR’s share value. Now we’ll see a redrawn U.S. newspaper map, as Pruitt tries to pay down his investment as much as possible and other publishers buy according to their own strategies. Look for Media News to expand its California holdings in a bid for the Mercury News, Contra Costa Times, and Monterey Herald. It makes sense that Gannett will look at medium- and smaller-market properties overall, and that Lee will build on its Midwest smaller city ownership. The wild card is the Newspaper Guild, which along with its partners Ownership Associates, Inc. and Duff & Phelps Securities, Inc. is bidding on nine of the 12 through its buying entity, ValuePlus Media. As it plays that card, it throws a new joker on the news table: public or quasi-public ownership of community-servicing news media, which would somewhat reshape the nature of the news business in the years to come.