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ST. LOUIS - If you want to see a beacon in the newspaper industry, go to Belleville, Ill. For glumness and malaise, head east to Philadelphia, or find the way to San Jose, Calif.
The McClatchy Co.'s $4.5 billion deal to buy Knight Ridder Inc.'s 32 daily newspapers rattled newsrooms across the country because it comes with a harsh edit. McClatchy will cut loose 12 Knight Ridder papers, including the Philadelphia Inquirer and San Jose Mercury News. The lesser-known Belleville News-Democrat is a keeper in the eyes of McClatchy, based in Sacramento, Calif.
The McClatchy-Knight Ridder deal shows that some of the most storied newspaper names in American journalism have sunk so low that they've become corporate castoffs. It also demonstrates how rocky the market has become for metropolitan newspapers.
In a conference call earlier this week, McClatchy Chairman Gary Pruitt acknowledged the widespread pessimism about the newspaper industry, but said it was misinformed.
"Here's a particularly telling example of newspapers' tremendous competitive reach: When the Steelers faced off against the Seahawks in the Super Bowl last month, 90.7 million people tuned in, television's best day of the year," Pruitt said. "But on that Sunday, indeed, on any average Sunday, 124 million read the Sunday paper, 27 percent more than watched the Super Bowl."
Pruitt also wrote a guest editorial in Thursday's Wall Street Journal detailing his faith in newspapers as a business.
Wall Street analysts and big investors don't evaluate newspaper chains on the number of Pulitzer Prizes they have won for reporting; Knight Ridder papers, by the way, have 84. Instead, they want advertising revenue growth, a growing Internet reach, operating profit margins well above 25 percent and newspapers in markets with robust new house growth.
"We are sorry their markets and business performance don't fit into the new McClatchy," Pruitt said of the papers to be sold.
Overall, newspapers remain quite profitable. For example, Knight Ridder's net income margin was nearly 16 percent in 2005. In contrast, Exxon Mobil Corp.'s net income margin was 10 percent last year.
McClatchy hopes it weeded out the laggards and kept the cream of Knight Ridder. As Lee Enterprises Inc. did last year when it bought former Post-Dispatch owner Pulitzer Inc., McClatchy is taking on a large amount of debt to finance an acquisition that catapults the company from unsung to a higher rung. McClatchy will be the No. 2 newspaper publisher behind USA Today owner Gannett Co.
With Pulitzer in the fold, Lee, of Davenport, Iowa, grew to seventh largest from 12th, based on daily circulation. The Post-Dispatch, Lee's largest newspaper, is a key reason for that climb up the ladder. But the St. Louis market has been a rough go for Lee so far.
In the nine months since Lee paid $1.46 billion for Pulitzer, the Post-Dispatch and the other St. Louis operations of old Pulitzer have weighed down Lee's overall performance. St. Louis ad revenue has declined, year over year, in seven of the last nine months through February.
Meanwhile, Lee's overall ad revenue, excluding the Pulitzer properties, has shown gains in each of those nine months. And so have the former Pulitzer operations outside of St. Louis, mostly small and medium-size newspapers.
Lee's stock price has dropped 20 percent since the Pulitzer deal closed June 3.
The financial performance in St. Louis could be worse. Lee has launched sales blitzes in St. Louis, finding new sources of ad revenue. The Post-Dispatch has been redesigned and signed up about 13,000 new subscribers who took advantage of sharp discounts. On the expense side, Lee said it will save at least $6.5 million a year after about 130 Post-Dispatch employees volunteered for early retirement.
Deutsche Bank analyst Paul Ginocchio lists Lee as a potential buyer for four of the Knight Ridder papers up for sale: the St. Paul Pioneer Press and the Duluth News Tribune in Minnesota, the Aberdeen American News in South Dakota, and Grand Forks Herald in North Dakota. Lee declined comment.
The words growth and newspapers usually don't go together when talking about an industry battling longstanding circulation declines, slack advertising growth, depressed stock prices and pressure from the Internet. McClatchy's Pruitt sees growth - albeit in selected markets - and he explained what he's looking for in a newspaper market.
"The projected household growth of our existing markets over the next five years is 11.9 percent," he said. At "the newspapers we plan to sell the projected household growth rate is 4.8 percent."
Belleville fits McClatchy's model partly because it's situated in St. Clair County, which is outstripping new house growth in the rest of the St. Louis region. In 2005, 12.8 percent of new houses in the St. Louis area were built in St. Clair County, compared to 8 percent in 2000.
News-Democrat Publisher Jay Tebbe declined to give any specifics about the paper's financial performance, except to say, "We're doing fine."
McClatchy said the keepers of the Knight Ridder chain are in markets that have projected household growth of 11.1 percent and achieve profit margins, excluding corporate overhead, of 30.3 percent, nearly identical to McClatchy's current properties.
McClatchy is paying 10.2 times Knight Ridder's 2005 operating profit. Lee bought Pulitzer for $1.46 billion, or 13.5 times Pulitzer's operating profit, according to Deutsche Bank.
Newspaper analyst John Morton said Lee paid a higher multiple because there are significant differences between the former Pulitzer papers and Knight Ridder.
"Knight Ridder had more doggie markets," Morton said. "If you strip out those 12 papers it plans to sell, McClatchy would have paid a higher multiple."
Jake Newman, a newspaper analyst at CreditSights Inc., said the Knight Ridder deal will squeeze McClatchy's profits for two years. He said the newspaper industry is managing to show some advertising sales growth only because papers keep raising rates.
Morton said Lee should be able to get St. Louis up to speed.
"But that takes time," he said.
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(c) 2006, St. Louis Post-Dispatch. Distributed by Knight Ridder/Tribune News Service.
