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November 10, 2005
Knight Ridder Sale Won't Rescue Newspaper Stocks
I don't think Knight-Ridder (KRI) is likely to receive a takeover much more than 10% above the current price. Further, I don't think the current situation surrounding KRI is likely to kick off a round of takeovers in the newspaper industry. Assuming KRI gets a bid, which is not guaranteed, it will provide support for newspaper equities around recent lows but it is also likely to confirm that recently depressed multiples are warranted. Without a sustained uptick in advertising growth, which I don't expect, I believe the stocks will be a value trap even if KRI goes out a price above current trading levels....
Potential Industry Buyers for KRI Are Limited
At 11 times EBITDA, KRI would sell for about $71. Historically, 11 times would be at the low end of newspaper industry deals. However, I think that would be the high end of any current deal for several reasons. First, the industry is severely growth challenged on a secular basis. The Internet is taking direct aim at key newspaper categories such as help wanted, classifieds, real estate and auto advertising. Even if the industry can hold market share, online ads have lower pricing so growth is sure to remain pressured. Second, there aren't many industry buyers out there for KRI. Gannett (GCI) is everyone's first choice and it is in GCI's corporate DNA to look hard at KRI. Beyond GCI, I just don't see who else bids. New York Times (NYT) and Tribune (TRB) are the other likely players and they both have problems of their own. Shareholders in those companies, and probably GCI as well, would react quite negatively to a deal for KRI, particularly at a premium to the current price. If GCI is the sole industry bidder, they have little incentive to pay any further premium.
Private Equity Group Is a Possible Bidder
One group that might bid is private equity. I suspect the KRI institutional shareholders advocating for sale of the company are counting on private equity. Lauren Fine of Merrill Lynch wrote a report several months ago that suggested LBOs of newspaper companies were likely to generate returns of only 10%. Even if she is off target, there doesn't appear to be huge return potential. KRI might be attractive to a private equity buyer with patience to sell off the pieces. This is probably the best chance to ultimately achieve a premium multiple for the company as individual papers probably have more potential buyers than the company as a whole.
KRI Saga May Confirm Currently Depressed Multiples
The bottom line is that if you are long KRI, you ought to take some chips off the table and be very glad that the shares have rallied 20%. If you aren't long KRI, I wouldn't enter at current prices as upside is not high enough relative to the odds of no deal or a long drawn out process that doesn't produce much further upside. If you are long other newspaper stocks and hope that a KRI sale will turn the stocks permanently upward, be prepared for the possibility that the KRI saga serves to confirm the currently depressed multiples rather than prove that the stocks are cheap by historical standards.
Posted by Steve Birenberg at November 10, 2005 02:27 PM
