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Potential Knight Ridder bidders emerge

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An alliance of private equity firms and the McClatchy newspaper group both are considering entering the running to buy Knight Ridder, publisher of the Grand Forks Herald, St. Paul Pioneer Press, Duluth News Tribune and 29 other U.S. newspapers, according to people familiar with the situation.

In addition, a board member of Gannett, the nation's largest newspaper company, said Thursday the company is not planning at this time to bid for Knight Ridder, which is the second-largest and faces a shareholder revolt demanding the company be sold.

Private-equity firms Blackstone Group, Providence Equity Partners and Kohlberg Kravis Roberts & Co. are considering a joint bid for Knight Ridder, according to a source with knowledge of the matter. But this group also reportedly is worried Knight Ridder, with a market value of $4.1 billion, is currently overpriced.

The first round of bids for Knight Ridder are due a week from today, so other bidders may still emerge who would be willing to pay higher premiums. Knight Ridder spokesman Polk Laffoon declined to comment.

"Given the softness of the advertising markets across the country, I'm not sure anyone is really ready to step up and bite off a big chunk like Knight Ridder," said Gannett director Karen Hastie Williams, a retired attorney who has served on Gannett's board for eight years. She said at this time, Gannett is not considering a bid.

Last month, Knight Ridder's three largest shareholders, who control 37 percent of the company's stock, demanded that the company put itself up for sale, citing the stock's poor performance. Knight Ridder has since said it is working with investment bankers at Goldman Sachs and Morgan Stanley to explore its options, including a possible sale.

Sacramento, Calif.-based McClatchy, which owns the Minneapolis-based Star Tribune, currently is weighing whether to make a bid, according to a person with knowledge of the company's thinking.

The company, whose controlling stock is closely held by family members, is known for publishing quality newspapers in fast-growing markets.

But it's considerably smaller than Knight Ridder McClatchy generates less than half Knight Ridder's annual revenue, for instance a factor that observers say would make it hard to launch a deal on its own. A McClatchy spokesman declined to comment.

In the Twin Cities, McClatchy's ownership of the Star Tribune likely would make it impossible for McClatchy to acquire the Pioneer Press and either merge the two papers or shut one down, experts said Thursday. That scenario would violate antitrust laws, said law professor Daniel Gifford, an antitrust expert at the University of Minnesota.

"It would be very difficult to impossible to justify combining two newspapers into one newspaper when those papers are essentially the principal newspapers in the market," Gifford said.

Certain exemptions from antitrust laws, contained in the Newspaper Preservation Act of 1970, apply only when a merger would prevent a failing newspaper from going out of business. That likely would not apply in the Twin Cities unless the Pioneer Press were in danger of "financial failure," Gifford said.

Phil Weiser, a University of Colorado law professor and former attorney in the Justice Department's antitrust unit, said making an argument that the Pioneer Press is failing "would be a somewhat unique one because the firm wouldn't be failing until it knew who its buyer was."

In a report released Wednesday by a Morgan Stanley securities analyst, the Pioneer Press was labeled one of the three worst performers in the Knight Ridder chain, as measured by operating profit margin. But that same analysis estimated that the paper will earn $12.1 million on revenue of $120.8 million this year and remain profitable and growing through 2011.

By some measures, the Pioneer Press appears to be performing relatively well. Its advertising revenue, for instance, is projected to increase about 5 percent this year after posting a similar increase in 2004, Publisher Par Ridder said. Knight Ridder's revenue is expected to grow 1.8 percent this year. (Knight Ridder does not disclose actual revenue figures for its individual papers.)

"St. Paul, if you grab the last couple of months, it's been the best performer," Ridder said. At the Star Tribune, which has more than twice the circulation of the Pioneer Press, McClatchy has reported that the paper's revenue has grown 0.2 percent through October, to $257.3 million.

Both papers are sharing in the industry's struggle to grow circulation, key to fueling advertising growth. The Pioneer Press' Monday-through-Saturday circulation fell 1.7 percent, to 188,082, in the six months ended Sept. 30, according to the Audit Bureau of Circulations. Sunday circulation dropped 8,939, or 3.5 percent, to 245,139. The Star Tribune's weekday numbers dropped by one-quarter of 1 percent to 374,528, while Sunday's dropped 41,673 to 636,977, or 6.1 percent.

The Wall Street Journal on Thursday first reported that the three private equity firms were considering a bid for Knight Ridder. Spokesmen with all three firms declined to comment on Thursday.

Knight Ridder still is in the first round of what could be a lengthy process. Initial bids essentially are exploratory and don't commit a company to make a final bid. In a typical buyout deal, the next step would be to have the investment bank screen the bidders and the company for sale and decide who it wants to let see Knight Ridder's books, a process that could take months.

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