|By the Project for Excellence in Journalism and Rick Edmonds of The Poynter Institute
For 10 months, 2005 was shaping up as another slow year for change in the landscape of who owned America ’s newspapers. All that was reversed in the first week of November when Private Capital Management, owner of 19% of Knight Ridder shares, demanded that the company be put up for sale. Two other large institutional shareholders supported exploring the possibility of a sale, and thus the company was thrust into play as an acquisition target.
Knight Ridder capitulated, at least to an extent. It hired Goldman Sachs and Morgan Stanley as advisers and agreed to accept bids. In January 2006, the company met with prospective bidders including McClatchy, MediaNews and a half-dozen private capital groups. Ultimately only McClatchy and one private equity group were confirmed bidders in mid-March as this report went to press.
What price Knight Ridder can fetch will be read as a barometer of investor opinion of the entire industry. At the end of the year its shares were up 20% and trading in the mid-$60s on the basis of the takeover possibility. A likely final price in the mid $80s would be a modest premium compared to transactions of the last 15 years. Knight Ridder also indicated that if the bids came in too low, it might choose not to sell.1
Even without a final chapter, putting Knight Ridder in play was a huge event for the industry. It amounted to an exclamation point on a dismal 18 months, in which newspaper stocks fell so sharply that the properties were in the bargain/clearance bin. It raised the possibility that purely financial players would take over a once-proud company, cut and slash much more deeply than current management and have little regard for journalism and public service. Or something else might happen.
Even people who disliked Knight Ridder management were unsure how to feel. “Overnight, Tony Ridder seemed to go from Darth Ridder to Anthony Skywalker,” an editor at the San Jose Mercury News told the Project in a private conversation.
Knight Ridder was especially vulnerable to a takeover because it lacks the structure of dual classes of voting stock, which ensures family control over public companies like the New York Times, Washington Post and others. Gannett has no family control, but is protected by its size and tradition of strong financial results. Tribune, while broadly traded, doesn’t have institutional owners with the clout of Private Capital Management. Its three largest institutional holders control barely 10% of the shares. About 25% of the total is owned by the McCormick Tribune Foundation and the Chandler family. The foundation’s board is essentially top company management, and the Chandler family would have influence on any sale or restructuring plan.2
By contrast, at Knight Ridder, Private Capital Management, and the longtime institutional shareholders Harris Associates and Southeastern Asset Management, control about 37% of the shares. Knight Ridder management was thus in no position to shrug off the pressure to explore a sale.3
The bill of particulars PCM held against Knight Ridder management was somewhat murky. In a letter that doubled as a Securities and Exchange Commission filing, Bruce Sherman, CEO of Private Capital, wrote that the company had “unexceptional operating margins.” He also said it had not adequately addressed the migration of traditional newspaper advertising to other media and lacked a national newspaper that could capture online national advertising.
Sherman said he was particularly disappointed that after Knight Ridder’s board met with him in July and took action, including raising the dividend, buying back 5 million shares of stock, making staff reductions and disposing of the Detroit Free Press and the Tallahassee Democrat, the share price fell rather than increased.4
Whether or not that is the heart of the matter, this much is clear: After more than a decade at the head of the company, Tony Ridder and his team appear to have lost favor in Wall Street circles. It is significant that Harris and Southeastern, patient investors through that entire period, now also see a sale as a potential exit strategy.
Their bet is that some set of financial and/or industry players will see potential in paying a premium for the stock, then restructuring the company or running it differently. All it takes is one buyer.
On the other hand, Knight Ridder stock, even at its Nov. 1 low, did no worse in 2005 than Gannett, Tribune or the New York Times. If stock price is the measure of corporate competence, the argument that Knight Ridder is poorly managed is not so airtight.
Beyond the Knight Ridder Sale
Earlier in the year, the biggest transaction of note was a three-way swap involving Knight Ridder, Gannett and Media News. Knight Ridder sold the Detroit Free Press to Gannett. Gannett transferred its Detroit News to MediaNews, owned by Dean Singleton , and restructured a joint operating agreement (JOA) between the two papers so that the Free Press gets 95% of the profits. Knight Ridder also sold the Tallahassee Democrat to Gannett, receiving three papers in the Pacific Northwest and cash in return.5
It was a sad end to the downward trajectory of Knight Ridder’s Detroit efforts. When the company entered into the JOA with Gannett in 1989, it looked like a license to print money on both sides. But the papers were hit with a protracted strike, and neither circulation nor advertising fully bounced back. The Free Press emerged as the circulation leader and was holding its own editorially. Along with other Knight Ridder papers, however, it went into a shrinking mode in both circulation and news investment.
In other 2005 transactions, Lee Enterprises completed its $1.5-billion acquisition of Pulitzer in January 2005 and vaulted to being the fourth largest public company in total circulation. Later in the year the Lawrence Eagle-Tribune, a well-regarded family-owned paper near Boston , was sold to Community Newspaper Holdings Inc. (CNHI) of Alabama.6
Market conditions did change during the year, but in offsetting ways. The 2005 climate was better for mergers and acquisitions generally than the first years of the decade. The reasons included abundant capital, still-moderate interest rates and the reduced share prices for newspaper stocks . There was buzz that financial groups with lots of money looking for deals might emerge, and they did turn up in the first round of Knight Ridder bidding.
But with all newspaper stocks down substantially, it was a disadvantageous time for companies like Gannett or Tribune to go on a shopping spree with cash, their own stock or added debt. Tribune, especially, had ample problems of its own. It also suffers from the perception that it paid too much and has delivered too little in its big 1999 acquisition of Times Mirror. Those papers — including the flagship Los Angeles Times — have not been strong financial performers.
Furthermore, the newspaper companies were using available cash and borrowing to acquire assorted Internet businesses, not other daily newspapers.7 (The Internet acquisitions are discussed separately in the Economics section of this chapter)
Could others get caught up in a Knight Ridder scenario? That seems unlikely. Though it is not always apparent, most independent newspapers, private chains, and even public companies are under family control (see accompanying chart). They are for sale only if the family chooses to put them in play, and there is no evident momentum for that. But speculation continues. Copley (private, its flagship the San Diego Times-Union) and Media General (public with family control) are seen as prospects because of generation shifts in top leadership.
Dow Jones has underperformed the rest of newspaper stocks because of sustained weakness of technology and financial advertising in the Wall Street Journal. Sale rumors resurfaced in August, and some critics increasingly argued that the company was poorly managed.8 The controlling Bancroft family offered a different solution than selling in January 2006 when the Dow Jones board replaced CEO Peter Kann with his No. 2, Rich Zannino. Karen Elliott House, the Wall Street Journal’s publisher and an aspirant for the top job, resigned.9 Investors responded positively to the changes. Dow Jones stock rose nearly 10% in the next several days.10
Finally, Freedom Newspapers (private, biggest holding the Orange County Register) teamed with an investment consortium in late 2003 to buy out dissident Hoiles family members. The disgruntled losers in that auction (Gannett and Media News) speculated that the company could be back on the block as soon as 2006 or 2007.
It remains theoretically possible that one or several of the public companies could put together a leveraged buyout and go private. But in practice that would mean trading a set of demanding owners for a set of demanding banking partners.
It is also possible, especially as stock prices get hammered down, that wealthy individuals may want to buy a paper as a trophy property like a sports franchise. The entertainment magnate David Geffen said in September that he wanted to acquire the Los Angeles Times.11 He got a meeting with top management at Tribune and a polite reply that the newspaper was not for sale. The billionaire Philip Anschutz extended his free-distribution Examiner papers to Washington and Baltimore. There is no indication yet how they are doing, though he has the deep pockets to carry years of start-up losses. The company is private, and releases little financial information.
Update on FCC Ownership Rules
There was considerable anticipation in 2005 that the Federal Communications Commission would relax the so-called “cross-ownership” rule that bars companies from owning newspapers and television stations in the same market, but it did not. A ruling from the five-member agency was expected sometime in early 2006, after President Bush appointed t he lawyer Robert McDowell to fill the seat left vacant by Kathleen Abernathy, whose term had expired .
Lauren Rich Fine, a media analyst for Merrill Lynch, told the Chicago Sun-Times in January 2006 that the unpredictability surrounding the future of cross-ownership rules “has cast a shadow over merger and acquisition activity.” In March 2005, for example, the Tribune Company was ordered to sell WTXX in Connecticut because it was in the same market as the company’s Hartford Courant. After an appeal, however, the FCC gave Tribune a two-year waiver.12 (For a more detailed discussion of potential FCC actions in 2006, see the ownership chapter in the Local Television report.)
Private newspaper companies rarely figure in a big way in discussions of industry economics because they are not required to report financial results and do so only sporadically. A number of big companies occupy the private side, though. Among them:
*Advance Publications, 26 newspapers including the Oregonian, the Star Ledger, in Newark , and the Plain Dealer, in Cleveland . It ranks fourth in circulation among all companies.
*MediaNews, controlled by Dean Singleton. It has 46 papers, with the Denver Post the flagship, and ranks eighth in daily circulation.
*Hearst, 12 newspapers including the San Francisco Chronicle, the Houston Chronicle and the San Antonio Express News. It ranks seventh in daily circulation, a bit ahead of McClatchy.
*Cox, 17 newspapers including the Atlanta Journal-Constitution, the Austin American-Statesman and the Palm Beach Post. It ranks 11 th in circulation, just behind E.W. Scripps.13
Those companies use their independence in different ways. Advance, especially, and Cox to an extent, invest in news quality. MediaNews is mostly about financial performance and acquisition. Historically, it has bid on properties no one else wants, and CEO Singleton has compared himself to a surgeon who saves some patients and loses others.14 Hearst has a mixed bag of holdings, including one hot market, San Antonio; one of the very few big-city papers, the San Francisco Chronicle, that are actually losing money, as well as the smaller paper (the Post-Intelligencer) in Seattle’s contentious Joint Operating Agreement whose other paper is the Times.
Advance faced one of the thorniest operating problems in 2006 — how to manage the New Orleans Times-Picayune as the city recovered slowly from the devastation of Hurricane Katrina. The company was unequivocal in saying it intended to keep operating the paper, but didn’t say what downsizing or other adjustments may be necessary.
As was the case in the first two editions of the annual report, around 20 newspaper companies continue to dominate both in the number of papers they own and in their share of total daily and Sunday circulation.
There were two changes worth reporting for 2005, however. First, the share of Sunday circulation belonging to the top companies declined two percentage points, from 75% to 73%.15
Second, daily circulation became even more concentrated among the 10 companies with the highest total circulation. According to the most recent data, those chains now accounted for 54% of total daily circulation, an increase of three percentage points over the previous year. Meanwhile, they accounted for an even greater share (58%) of Sunday circulation, although that number increased only one percentage point over the previous year.16
1. The Knight Ridder auction was widely covered. A good summary was Charles Layton’s “ Sherman ’s March,” American Journalism Review, February/March 2006. Douglas Arthur, Morgan Stanley’s newspaper analyst, explained the case for acquisition in a November 29, 2005 , report, “Knight Ridder: A Scenario Analysis,” http://www.poynterextra.org/KR/Research.pdf
On March 13, 2006, McClatchy announced it had acquired Knight Ridder for $6.5 billion to become the country’s second largest newspaper publisher. The McClatchy Company press release, “McClatchy to Acquire Knight Ridder–Becomes Country’s Second Largest Newspaper Publisher,” March 13, 2006.
3. Yahoo! Finance breakdown of major holders. Available online at: http://finance.yahoo.com/q/mh?s=KRI.
4. Letter from Bruce S. Sherman, CEO of Private Capital Management, L.P. Letter dated November 1, 2005 . Available online at: http://sec.gov/Archives/edgar/data/205520/000089722605000213/kri2.txt
5. Joe Strupp, “Knight Ridder, Gannett, MediaNews Strike Blockbuster Deal,” Editor & Publisher, August 3, 2005.
6. “2005 Newspaper M & A Values Up 72%, Says Report,” News Inc. January 9, 2006.
7. Gannett, “ Gannett completes acquisition of HomeTown Communications Network’s assets; Richard Aginian named consultant and president and publisher of Detroit suburban group,” Gannett press release, March 31, 2005 . Available online at: http://www.gannett.com/go/press/pr033105.htm.
8. Franklin Foer, “The Journal At Sea,” New York , September 12, 2005.
9. Devin Leonard, “Big News at Dow Jones,” Fortune, January 20, 2006.
10. Yahoo! Finance.
11. James Rainey, “Geffen Eyes Another Medium: The Times,” Los Angeles Times, September 17, 2005.
12. Eric Herman, “Pressure Rises for Trib Chief,” Chicago Sun-Times, January 3, 2006.
13. Circulation rankings from Paul Ginocchio, “Newspaper Publishers Keeping Cash in Circulation,” Deutsche Bank Securities, August 11, 2003. Holdings from “Newspaper Primer, 5 th Edition,” Lauren Rich Fine, Merrill Lynch, May 11, 2001.
14. Scott Sherman, “The Evolution of William Dean Singleton,” Columbia Journalism Review, March/April 2003.
15. International Yearbook, Editor & Publisher, 2005; PEJ research.
17. “Scripps Closing Birmingham Post-Herald, Dissolving JOA,” Editor and Publisher online, September 22, 2005.
18. Chris Jones and J.M. Kalil, “ Las Vegas Sun to rise with morning R-J,” Las Vegas Review Journal, June 15, 2005.
19. “ Cincinnati newspaper agreement will not be renewed after 2007,” Cincinnati Post, January 16, 2004.
20. “12 Cities Still Have JOA’s,” Seattle Post-Intelligencer, April 29, 2003.
21. Bill Richards, “JOA fight may have different twist in next stage,” Seattle Times, August 21, 2005.