1st Quarter 2006
McClatchy Will Be #2 - Acquisition Is Largest in Total Circulation
So much for the doomsayers of the newspaper industry.
The McClatchy Co. made a big “vote of confidence” in the future of newspapers, paying $6.5 billion for Knight Ridder, the nation’s second largest newspaper company, and adding some of the nation’s top growth markets in the process.
McClatchy said it would sell 12 of the daily newspapers it is acquiring from Knight Ridder. Even so, the deal will vault the family-controlled company into second place in terms of circulation behind Gannett.
Making the announcement, McClatchy CEO Gary Pruitt said, “Although audiences get news in many new ways today, the appetite for independent, useful information is greater than ever, and the opportunities for a news company that meets these needs is unlimited.”
McClatchy reported that Knight Ridder generated $3.1 billion in revenue and $638 million in earnings before interest, taxes, depreciation and amortization (EBITDA) on a pro forma basis for full year ownership of newspapers added in the past year.
Based on the pro forma results, the purchase price represents 10.2 times EBITDA and 2.1 times revenue. McClatchy said the EBITDA multiple was 9.5 times, after factoring in Knight Ridder’s off balance sheet assets.
These multiples are lower than many of the other large transactions in the industry in recent years. Pulitzer sold last year for 13.5 times EBITDA; Central Newspapers sold for 13.0 times EBITDA in 2000; and Times Mirror fetched 12.9 times EBITDA in 2000. Thomson Newspapers sold its newspapers in a series of transactions in 2000, with multiples ranging from 10 times EBITDA to the mid-teens.
The sheer size of the Knight Ridder transaction meant that only a few could play. In addition, some large companies, including Gannett, had cross-ownership issues because their television stations overlapped with Knight Ridder’s newspaper markets. Companies are prohibited from owning daily newspapers and broadcast television stations in the same market under current regulations.
In terms of circulation, the Knight Ridder transaction is the largest in the newspaper industry’s history.
With the exception of the Times Mirror transaction (which at $7.2 billion is the only one larger than the Knight Ridder deal in dollar terms), the size of the other transactions allowed more buyers to pursue them, pushing up the prices.
Tribune bought Times Mirror without an auction process, and because of the relatively low margins at Times Mirror, the revenue multiple was 2.6 times.
We expect that most of the Knight Ridder newspapers to be spun off by McClatchy will command multiples in excess of the multiple paid for the company as a whole, as the field of buyers is greatly expanded.
Both strategic and non-strategic buyers will take a strong interest in the newspapers to be divested, most of which have circulation greater than 20,000.
This demonstrates the strength of the underlying assets and the continuing strength of the private marketplace for newspaper properties.
The 12 newspapers to be sold do not fit McClatchy’s longstanding criteria of buying operations in high-growth markets. However, most are experiencing solid growth trends and operate largely in non-competitive markets, with a few exceptions.
When the divestitures are completed, McClatchy will own 32 daily newspapers and about 50 non-dailies. The dailies will have combined daily circulation of 3.2 million.
In addition to the newspaper properties, McClatchy is acquiring a number of important online assets. These include the national Real Cities network, a one-third interest in CareerBuilder and other interactive businesses.