McClatchy: Mixed News
Sometimes there's nothing like a high-profile merger or takeover to spark a lagging stock sector. However, the sale of Knight Ridder to McClatchy (symbol MNI), a Sacramento-based chain known for its high-quality journalism, should resonate more in newsrooms than on the stock exchanges.
For one thing, the deal is more a quasi-merger than a full-scale acquisition. McClatchy plans to resell 12 of the Knight Ridder newspapers into a market where few buyers are apparently willing to pay premium prices for papers. That's especially the case for papers with unionized work forces, which is true of most of the Knight-Ridder properties that McClatchy wants to jettison.
However, newspaper investors face challenges beyond just newsroom staffing. Despite years of layoffs and employee buyouts, profit margins at all major news chains, including Dow Jones, Gannett and New York Times, are at seven-to-nine-year lows. You can blame slow advertising growth -- in some cases, chains have experienced outright declines -- as retailers merge and all kinds of advertising, such as help-wanted and real estate, migrates to the Internet. McClatchy has bucked the advertising and circulation downtrend better than most publishers, but it, too, has seen overall profit margins slide steadily since 1999. And because it will be hard to evaluate the deal to buy Knight-Ridder until it's known what McClatchy gets for the papers it's reselling, the stock will go nowhere or backtrack for a while.
The shares fell nearly 1% on Tuesday, to $51, and trade at only 15 times estimated 2006 earnings. But they're not especially cheap, if for no other reason that the unknowns about the rest of the story make estimates even less reliable than usual.
One thing is known, though: The early reaction from analysts to the terms of the transaction is bored to flat-out negative. Lauren Fine of Merrill Lynch, one of the most influential newspaper analysts, says she's neutral, saying that McClatchy is essentially "doubling down" on newspapers and taking on a lot of debt to make this bet. Steven Barlow of Prudential Securities warns to beware of short-term complications, while Brian Shipman of UBS cut his target price for McClatchy a whopping 20%, to $53, based on a host of unknowns. (Target prices themselves are often less useful to investors than whether the analyst is boosting them or slashing.)
Toss in all of the other issues in the newspaper business, such as rising newsprint and energy costs, and it's easy to see why the industry doesn't hold much investment appeal. If you live in Miami or Charlotte, be glad that you'll still have a first-rate newspaper -- but don't rush to buy the new owner's shares.
--Jeffrey R. Kosnett