Knight Ridder in grave jeopardy
By Lou Alexander
Posted Nov. 3, 2005
Power brokers on Wall Street have ensured that the relatively comfortable status
quo employees and readers of Knight Ridder's newspapers and Web sites enjoyed
as recently as Monday is gone.
Things are going to change forever in the 29 markets the company serves with
daily newspapers and the 110 markets reached by Knight Ridder Digital. None
of the scenarios that can reasonably be anticipated allow Knight Ridder and
its newspapers to operate in the future as they have in the past. And I assure
you there will be chaos and uncertainty
On Tuesday Bruce S. Sherman from Private Capital Management, L.P., the largest
shareholder in the company, wrote Knight Ridder's board of directors urging
them to "aggressively pursue the competitive sale of the Company"
because of the poor performance of the stock. If the board is not willing to
sell the company Sherman threatened what would essentially be an unfriendly
takeover. PCM owns about 19% of Knight Ridder Inc.
Situation deteriorating for KRI
Not too surprisingly, the situation, from Knight Ridder's perspective has worsened
in the last few hours:
- The second largest owner of KRI stock is Southeastern Asset Management Inc.
It holds an 8.9% stake in Knight Ridder, and in a regulatory filing
on Thursday said that it wants the flexibility to enter talks with management
and other shareholders about the future of the company.
- The third-largest owner of KRI stock is Harris Associates L.P., a Chicago-based
money manager. They sent a letter
to Knight Ridder's board this morning urging the company to consider offers
"immediately" given the wide gap between the company's current share
price and its fair value. Harris has an 8.2% stake in Knight Ridder.
These three companies own an aggregate of more than 35% of Knight Ridder stock.
Although this is probably enough to force a sale in the arcane world of public
companies, they will have little trouble getting the votes of more than 50%
of the stockholders if they need it.
Knight Ridder does not control its own stock. About 90% of Knight Ridder stock
is owned by institutions rather than individuals. According to Yahoo
Finance, about 57% is owned by 10 large institutional investors, including
the three listed above. Another 17% is owned by 10 large mutual funds. The details
of the numbers have surely changed in the last few days but almost all of the
stock is held by people to whom newspapers and quality journalism is secondary
to returning maximum shareholder value.
am pretty certain that Tony would prefer to have the company sold to another
newspaper company. He does not want the company where he has spent his
entire life broken up.
There is no way to know for sure, but it is a reasonable bet that Mr. Sherman
knew or had a good idea in advance of his letter to the board on Monday how
Southeastern and Harris would react to his move.
I told you so
This is one of those times when the old expression "I hate it when I'm
right" really applies. On Sept. 20, Grade the News posted a commentary
I had written in which I explained that publicly traded newspaper companies
faced terrible dangers if they did not maintain margins high enough to meet
the demands of their shareholders.
I assure you I did not have any inside information before the news started
breaking Tuesday and I take little pleasure in being prescient. The San
Jose Mercury News is still a great newspaper as are the other KRI papers
I read on the Web. I have friends on the KRI corporate staff, at the Mercury
News and other KRI newspapers. And I am one of a large group of KRI retirees
dependent on the company for pensions and medical coverage. I am very sorry
we will all have to face the uncertainty and chaos the weeks ahead will entail.
Here is my take on some of the likely scenarios:
- Knight Ridder makes a fight of it. I think this is a real
likelihood. Tony Ridder is a proud and purposeful person. He does not want
to be the member of the Ridder family blamed for the loss of the company.
Unfortunately, Tony and the other insiders at KRI control less than 2% of
That means to win the fight KRI will have to buy out the dissident shareholders,
mostly likely as part of a leveraged buyout. The various financial sites on
the Web seem to be settling on a buyout price of $80 a share for KRI stock,
which has around 70 million shares outstanding. I do not want to get lost
in the math, but if that price holds (I think it is actually a little low)
KRI will have to raise billions of dollars.
There are two ways to do this. They sell off one or more newspapers (an investor
hinted at the need to sell off the Philadelphia Newspapers during the third
quarter financial conference
call on Wednesday, Oct. 19), or they borrow the money.
Selling off newspapers starts the breakup of the company. Borrowing money
means that instead of being a slave to the stock market, Knight Ridder will
be a slave to the interest payments required on the LBO loans. The margin
pressure will almost surely go up if Knight Ridder is taken private as part
of a leveraged buyout. Any of you who worked for Harte Hanks Newspapers when
they went through the LBO in the 1980s will remember how much the need to
drive profit went up in that company which was already very margin driven.
- Knight Ridder makes a compromise with Bruce S. Sherman.
This would mean that Mr. Sherman and/or others of his choosing get seats on
the Knight Ridder board of directors. I also think it would mean changes in
the top management at Knight Ridder. Mr. Ridder is 65 years old and has made
noises about retiring. He could bow out now and allow a restructured board
to bring in a turnaround specialist.
A turnaround specialist would almost surely be from outside the newspaper
industry. About the only skill that counts in a person like this is the ability
to increase the stock price.
Maintaining the journalistic traditions of Knight Ridder would be seriously
at risk in this scenario.
I think there is at least some chance of this happening. Mr. Sherman would
not have acquired about 19% of KRI stock if he did not think there was money
to be made. Also, in his letter to the board he said that if Knight Ridder
were not sold his company "would strongly consider supporting more aggressive
efforts that might be initiated by other parties seeking to change the composition
of the Board, install new management, acquire a majority of the Company's
voting shares, or take other action to maximize shareholder value."
- The company is sold either to another newspaper company
or a private equity company.
I know the financial industry is split on the issue of whether or not anyone
would buy Knight Ridder. But from my seat as a former ad sales manager, the
sale of Knight Ridder to Gannett or Tribune Company works. A combination of
Knight Ridder and either of these companies would create a potent national
network for advertisers. A network of this size would have the potential to
capture some of the ad buys that now go to the Web and broadcast. And I think
the people who would run this combined company would also find new ways to
exploit the sales power of the network.
I suspect there are some economies of scale that a company this size could
apply to many different parts of the newspapers.
Also, I am pretty certain that Tony would prefer to have the company sold
to another newspaper company. He does not want the company where he has spent
his entire life broken up.
As for the Justice Department concerns, they are not overwhelming. Cross ownership
issues that might crop up are not deal breakers, especially with the current
There might be other suitors -- McClatchy has been mentioned -- but I think
it will take somebody the size of Gannett or Tribune to benefit from the sale
enough to pay the premium price this deal will require.
So this brings me back to my earlier point. The status quo has changed. We
are all in for a period of chaos and uncertainty.
Let me leave you with one more thought. Knight Ridder is not the only company
that has lost control of its stock. Several of the public companies have most
of their stock in the hands of institutional investors, including Bruce Sherman
of Private Capital Management. If institutional investors can generate billions
in profit by forcing major changes on Knight Ridder it is reasonable to wonder
where they will turn next.
Lou Alexander spent 20 years in the advertising department of the San
Jose Mercury News, rising to the top jobs in both display and classified
before retiring in 2004. Before turning to the business side, he was a journalist
for eight years. He lives in San Jose.