Newspaper Chain to Be Dismantled

MediaNews Group Inc., the Denver company that owns the Daily News and seven other Southland newspapers, is emerging as a leading contender to snap up some of the papers being put on the auction block as a result of Monday’s sale of Knight Ridder Inc.

McClatchy Co. said it would buy the larger Knight Ridder for $4.5 billion in cash and stock, making the owner of the Sacramento Bee, the Fresno Bee and 10 other daily papers the second-largest newspaper chain in the nation based on circulation. McClatchy, now the No. 8 chain, will get 32 daily papers and their websites, a string of other publications and Knight Ridder’s one-third stake in online employment site CareerBuilder.com.

To finance the sale, McClatchy plans to unload 12 Knight Ridder papers that are in slower-growing markets, including three of the San Jose-based chain’s four California newspapers -- the San Jose Mercury News, the Monterey County Herald and the Contra Costa Times.

MediaNews Chief Executive William Dean Singleton has toured the Mercury News, the Philadelphia Inquirer and other Knight Ridder papers that McClatchy wants to sell, and he is expected to bid for many or even all of them, according to people familiar with the auction process.

Singleton’s company owns a controlling stake in more than 30 California publications in addition to the Daily News, including the Long Beach Press-Telegram, the Pasadena Star-News and the Oakland Tribune. Singleton typically buys small or struggling papers and has a reputation for cutting expenses rather than investing in news gathering, said Ben Bagdikian, former dean of the journalism graduate school at UC Berkeley.

“He’s a low-cost, high-profit operator,” Bagdikian said.

MediaNews unexpectedly dropped out of the bidding for all of Knight Ridder at the last minute because it saw a way to get just the papers it wanted most, said two people involved in the process. “MediaNews has put a lot of work into this thing,” said an industry executive, who spoke on condition of anonymity because the bidding process is supposed to remain confidential.

Another possible buyer is the Newspaper Guild-Communications Workers of America. Nine of Knight Ridder’s 32 daily papers are unionized, and eight of those are on McClatchy’s “for sale” list. The guild has found a deep-pocketed partner in Yucaipa Cos., a Los Angeles investment firm run by former supermarket magnate Ron Burkle.

The McClatchy agreement ends the first chapter of a saga that began in November, when major Knight Ridder shareholders, dissatisfied with the company’s lagging stock price, began agitating for a sale. The subsequent auction was seen as a referendum on the newspaper industry, which has struggled with stagnant circulation and tepid advertising growth.

Although the deal with Sacramento-based McClatchy was reassuring to some who feared that no serious offer would emerge, the paucity of bids and McClatchy’s piecemeal approach mean the verdict is still out on the industry, analysts said. The only other bidder at last Thursday’s deadline was a coalition of five investment firms. Those companies aren’t interested in pursuing the papers McClatchy doesn’t want, according to a person working with the investment firms.

“These are still good businesses, and they have great balance sheets,” said analyst Alexia Quadrani of Bear, Stearns & Co. “But I do think that the ad market is increasingly fragmented and that we’ll see more lackluster growth going forward.”

McClatchy CEO Gary Pruitt, 48, said the decision to buy Knight Ridder reflected his “firm and continuing faith” in newspapers and their websites, which combine to reach more people than any other news medium in most communities.

“More people want what we produce today than wanted it yesterday,” Pruitt said. “That is not the profile of a dying industry.”

But McClatchy is hedging its bet by keeping only the papers that most closely track its strategy of owning quality publications in faster-growing markets with little competition, said analyst John Morton. Those include the Miami Herald, the Charlotte (N.C.) Observer, the Lexington (Ky.) Herald-Leader and the Tribune in San Luis Obispo.

“They’re keeping the cream of the crop,” agreed industry analyst Edward Atorino of Benchmark Co.

McClatchy’s planned sale of the Mercury News and the other California papers means that most of Knight Ridder’s California readers won’t benefit from the Sacramento chain’s penchant for reinvesting in its newsrooms.

It’s not clear what direction the union-Yucaipa alliance would take with any papers it might succeed in buying. Singleton, meanwhile, employs a “clustering” strategy, acquiring several papers in the same region and then cutting costs by consolidating newsroom and back-office operations.

Singleton isn’t likely to end up with all 12 unwanted papers, according to one person tracking potential transactions.

The St. Paul Pioneer Press, which is on the block because McClatchy’s ownership of the nearby Minneapolis Star Tribune raises antitrust concerns, might find a different home. And three smaller papers in South Dakota, North Dakota and Minnesota might be most attractive to a regional publisher, the person said.

Gannett might take a look at some of the leftovers, as might Journal-Register Co. of Trenton, N.J., and other small chains with different acquisition criteria.

In total, McClatchy hopes to bring in more than $2 billion for the 12 papers, all of which would be applied to paying down debt from the acquisition.

Pruitt said he expected to close the side deals this summer, at the same time as the Knight Ridder purchase. He said no newsroom layoffs were planned, though most of Knight Ridder’s 135 corporate staffers are expected to be laid off or transferred to Sacramento. In addition, some online sites will be consolidated.

Knight Ridder CEO Tony Ridder, who only reluctantly put the company founded by his great-grandfather up for sale, was disappointed that McClatchy won’t keep the chain intact, Knight Ridder spokesman Polk Laffoon said. About 45% of the company’s employees work at the dozen orphaned papers.

Still, “the company and Tony feel very positive about McClatchy’s history as a strong steward of fine newspapers. Clearly, strong journalism is important to them,” Laffoon said.

Ridder, 65, rose through the ranks at the company even though the Knight and Ridder families lost majority control of the firm three decades ago. He got the top job in 1995 and worked to push profit margins toward the industry average. But repeated rounds of cutbacks have made the papers more dispensable, former executives said, and circulation has suffered.

Like many newspaper companies, including the various owners of the Washington Post, the Wall Street Journal and the New York Times, the McClatchy family has used a second class of stock to keep control of their company even after selling shares to the public. Since founding the company as Sacramento’s Daily Bee in 1857, the family has been insulated from the sort of shareholder pressure that forced Knight Ridder’s sale.

Under terms of the deal announced Monday, which must be approved by Knight Ridder shareholders, McClatchy is offering $40 in cash and 0.5118 of a share of McClatchy’s Class A stock for each share of Knight Ridder. McClatchy is also assuming $2 billion in Knight Ridder debt.

The value of the deal -- $67.25 a share based on McClatchy’s Friday closing price -- slipped to $66.38 a share after McClatchy’s stock fell $1.69 to $51.55 on Monday. That’s still almost 25% above where Knight Ridder was trading before its shareholders started pushing for a sale. Knight Ridder closed Monday at $63.92, down $1.08.

Money manager Bruce Sherman’s Private Capital Management, which at year’s end owned 18.5% of the company and led the charge for change, will be a major beneficiary of the sale.

Under a severance agreement adopted in January, Tony Ridder will get triple his annual salary and bonus, which in 2004 was about $1.7 million. As of a year ago, he also owned or controlled 1.4 million shares and options for shares, worth at least $45 million.