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January 30, 2006

Knight Ridder Earnings Preview: Waiting On The Auction

It would be very surprising if anything of substance came from the earnings release and conference for the 4Q05 report by Knight Ridder (KRI). First, the company is in the midst of an auction with presentations being made to a number of interested industry and private equity buyers. This will probably restrict what management can say in its press release and on its conference call. Second, even if management does decide to be chatty, the fact that last week saw earnings reports from New York Times (NYT), Dow Jones (DJ), and Gannett (GCI) means we already have a pretty good picture of what is happening in the newspaper industry. Each of those companies revealed some strengthening in advertising trends in December, particularly in the national category. While each also noted that the seasonally small January was not confirming the trend, all remained confident that March quarter numbers would show improvement. Let's see if KRI confirms this outlook or not....

KRI guided to $1.23 last December and affirmed the figure when it issued a sluggish November revenue report in late December. Thus, there should be no surprises on the headline number. Revenue is projected at $818 million. 1Q06 consensus calls for EPS of 67 cents on revenue of $735 million. For all of 2006, analysts are looking for EPS of $3.69, an increase of 5.7% on a revenue gain of about 2%.

There have been numerous newspaper articles discussing the auction of KRI. Most recently, it appears that KRI has been telling potential suitors that cost cutting could push EBITDA up by at least 20% vs. the current annual run rate of just over $600 million. Apparently, this figure seemed to good to be true as it sent suitors scrambling to re-analyze their own models with the results being a delay in the outcome of the auction until late February or possibly March.

Press reports indicate that a number of suitors have emerged including GCI, McClatchy (MNI), privately held Media News, and all the big names in private equity. Despite the wide interest, KRI shares have stalled in the low $60s as a multiple above 10 times EBITDA does not seem to be in the cards. This would cap the auction at about $70 based on current estimates. The buyer won’t want to give up any of that 20% potential EBITDA boost to current shareholders so the stock did not move up on the news. I suspect though that current shareholders will sue if the company accepts a bid that does not compensate at least partially for the potential EBITDA pop.

The best preparation you can do for KRI's earnings call is to pull up recent news reports on the auction and to review the earnings summaries I did last week for NYT, DJ, and GCI. I don’t plan on getting long KRI under any circumstance short of the collapse of the auction and a sharp decline in the stock.

Posted by Steve Birenberg at January 30, 2006 01:58 PM in KRI