Risky business

McClatchy closes Knight Ridder purchase and enters a perilous, uncertain future

On Monday, June 26, Knight Ridder newspapers ceased to exist. The mantle of the nation’s second-largest newspaper chain passed to the Sacramento-based McClatchy Co., which purchased Knight Ridder for $6.5 billion in March. It appears CEO Gary Pruitt’s latest gamble is a done deal.

Whether it’s a good deal remains to be seen. So far, Wall Street has punished McClatchy for its risk taking, pushing the company’s stock price down almost 40 percent, from $66.29 per share last November, when rumors of the purchase began circulating, to $40.39 on Tuesday, the day after the deal closed.

“We’re disappointed that the stock has declined since the announcement,” Pruitt told SN&R. “We believe this is a good deal that will strengthen the company.”

Because the $6.5 billion purchase was tendered with $1.8 billion in McClatchy stock, the drop in stock price has reduced the deal’s value by $400 million—before Pruitt and company have even driven off the showroom floor.

As previously reported in SN&R (see “The media, the market & McClatchy,” SN&R Feature Story, May 18), a decline in stock price was expected, considering that McClatchy absorbed $2 billion of debt with the purchase. Wall Street’s concern should lessen somewhat now that the deal is completed, but Pruitt, obviously concerned about the decline, was in no mood to prognosticate.

“I don’t know,” he said. “We expect to deliver on this deal. We’ll do our best, and the stock price will take care of itself.”

The transaction brings to an end the involvement of two families whose names have been synonymous with newspaper publishing for more than 100 years, the Ridders and the Knights. Herman Ridder founded Ridder Publications in 1892; Charles Landon Knight purchased the Akron Beacon Journal in 1903 and later passed it on to his son John, who founded Knight Newspapers in 1933.

Old school, sold school: Knight Newspapers founder John Knight hunting and pecking his way to a Pulitzer.

The two privately held companies went public in 1969 and merged in 1974, when Knight acquired Ridder. At the time of the merger, John Knight, then in his 80s, told a roomful of financial analysts, “Ladies and gentlemen, I do not intend to become your prisoner.” The Pulitzer Prize-winning editor and publisher was true to his word, passing away several years later, nearly three decades before profit-hungry shareholders forced the sale of the company that bore his and the Ridder families’ names. Former Knight-Ridder head Tony Ridder will sit on McClatchy’s board of directors.

Another name involved in the deal has been associated with newspapers for more than 100 years as well. James McClatchy co-founded The Sacramento Bee in 1857. With the purchase of Knight Ridder, the McClatchy family’s empire now consists of 32 newspapers, a chain stretching from Miami to Anchorage. Although the Knight Ridder name is going away, its legacy, which includes 85 Pulitzer Prizes, will remain, Pruitt said.

“The way I think of it is Knight Ridder is indeed going away,” he explained. “When we close, it will no longer exist. But the tradition and heritage of Knight Ridder will live on in the form of McClatchy.”

McClatchy now takes Knight Ridder’s position as second largest in an elite club of publishing giants that includes Gannett (the largest), Tribune Co. (with its flagships, the Chicago Tribune and the Los Angeles Times) and The New York Times Co. According to industry trade magazine Editor & Publisher, the top 10 newspaper chains control more than 50 percent of the daily and Sunday newspaper circulation in the United States.

As it’s turning out, however, size may not matter. The big four newspaper chains—Gannett, McClatchy, Tribune and The New York Times—all are publicly held and subject to shareholder angst, which lately has decreed profit margins of less than 20 percent annually as insufficient. Because the majority of McClatchy’s shares are held by family members and a family trust, the company is in a better position than most. Nevertheless, it is by no means immune to market forces, as its declining stock price indicates.

The sale of all 12 of the Knight Ridder newspapers McClatchy elected not to keep should help calm investor nerves. After taxes, Pruitt said, the company will net approximately $1.5 billion, most of which will be used to pay down the $2 billion debt assumed with the purchase.

Still, the sales have not been without controversy. On Tuesday, June 27, the Department of Justice (DOJ) announced that McClatchy and Knight Ridder would have to “divest the St. Paul Pioneer Press in order to proceed with their proposed multi-million dollar merger.” McClatchy owns the Minneapolis Star Tribune, and the department noted that “the transaction, as originally proposed, would have eliminated head-to-head competition between McClatchy and Knight Ridder and likely would have resulted in higher prices for advertisers and readers in the Minneapolis/St. Paul area.”

McClatchy previously had agreed to sell the Pioneer Press; the DOJ’s decision is not expected to affect the Knight Ridder deal’s closure.

Knight Ridder’s former headquarters in San Jose.

Closer to home, MediaNews, headed by Dean Singleton, has purchased former Knight Ridder properties the San Jose Mercury News, the Contra Costa Times and the Monterey Herald, along with a host of smaller community papers in the Bay Area. However, because MediaNews partnered with the Hearst Corp. (owner of the San Francisco Chronicle) to finance the deal, and both companies own papers in the region, the DOJ is investigating the purchase for potential antitrust violations. Last week, the department announced it had not completed its inquiry and was extending the investigation, which again will have no effect on the deal’s closure, as long as the parties abide by the department’s findings.

“All I can tell you is that we’re looking at the competitive aspects of the transaction and the investigation is ongoing,” said DOJ antitrust-division spokeswoman Gina Talamona.

Another controversy has surrounded the purchase of the Philadelphia Daily News and The Philadelphia Inquirer by a group of local investors headed by advertising tycoon Brian Tierney and developer Bruce Toll. Tierney in particular has a storied relationship with the Inquirer that goes back to the early 1990s, when he intervened with editors on behalf of a client, the local Catholic archdiocese, in order to stifle an investigation into the church’s finances.

Pruitt said McClatchy was aware of Tierney’s past involvement with the paper and that both Toll and Tierney signed a pledge that they would not interfere with editorial decisions at either paper.

“We were aware of [Tierney’s] job and his role in Philadelphia,” he said. “We were aware that many prominent businessmen and businesswomen were gathering together to buy the papers. On balance, we thought this was good, because they have a deep commitment to Philadelphia and the papers.” However, Pruitt pointed out that “when you have prominent local businessmen involved with the paper, it can affect the news coverage. They signed a pledge, and we expect them to stand by it.”

Pruitt expects McClatchy’s stock price to weather the storm.

“We’ve been here before, with Raleigh, then Minneapolis,” he said. In 1995, McClatchy purchased The News & Observer in Raleigh, N.C. Three years later, it bought the Minneapolis Star Tribune. Both deals were criticized as being too risky by some members of the newspaper industry, but the gambits paid off.

“From 1995 to 2000, we had the best-performing stock in the industry,” Pruitt said. “We expect we will continue to outperform the industry in terms of advertising revenue and other financial metrics.”

Will the gamble pay off? Only time, and the stock ticker, will tell.