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SAN JOSE, Calif. - McClatchy said interest in the 12 Knight Ridder papers it's selling - including the San Jose Mercury News - has been high and that it continues to "feel good about our expectation for the proceeds" during a conference call with Wall Street analysts that mainly focused on its disappointing first-quarter earnings.
As McClatchy prepares to double its bet on newspapers by acquiring Knight Ridder, its latest earnings report did little to ease the anxieties of investors who worry that the company is expanding too deeply into a fading industry. After McClatchy missed the revenue and profit targets set by Wall Street, investors sent the company's stock down 2 percent to a new four-year low at $47 a share.
Last month, McClatchy announced that it planned to acquire Knight Ridder of San Jose in a deal valued at $4.5 billion, using a mix of cash and stock. McClatchy also said it planned to sell the Mercury News and 11 other Knight Ridder newspapers to help finance the deal.
Investor reaction to the deal has been mixed. McClatchy's stock has fallen 11.7 percent since the deal was announced, and the value of the deal has slipped to $4.29 billion. Many investors are waiting to see how much money the sale of the 12 papers fetches.
In a conference call with analysts, McClatchy Chief Executive and Chairman Gary Pruitt declined to provide much detail on the current sale process. Pruitt said deals for the papers would be announced as agreements were signed.
"We are moving quickly to divest the 12 papers identified for sale, partly to focus on integrating the other 20 into the new McClatchy and partly to end uncertainty for the employees of those papers," Pruitt said. "We have been gratified by the level of interest in these 12 newspapers we are selling, and we still intend to divest some and perhaps all of those papers simultaneously, with the closing of the Knight Ridder acquisition this summer."
The sale of the papers has apparently attracted a range of bidders. The are two leading candidates to acquire the Mercury News. One is MediaNews, a privately held newspaper company based in Denver that owns the Oakland Tribune and a host of other Bay Area papers. The other is Yucaipa Cos., a private equity firm that was recruited by the Newspaper Guild and is interested in all 12 newspapers.
McClatchy has consistently declined to discuss details of the sale process. It remains unclear when a deal for the Mercury News, or any of the other 11 papers, will be announced.
However, Pruitt said on Thursday he still hoped to close the deal with Knight Ridder on July 1, though that may depend on how quickly federal anti-trust regulators complete a routine review of the deal.
In the meantime, Pruitt's company is being hit by many of the same trends that have newspapers out of favor with Wall Street. Indeed, several other newspaper companies reported disappointing earnings on Thursday, including Tribune, the New York Times, and the Journal Register.
McClatchy said that rising expenses - in part because of the expensing of stock options - combined with flat ad revenue cut its profit. It reported net income of $27.7 million - down from $32.3 million for the same quarter in 2005.
During the first three months of 2005, McClatchy posted revenue of $282 million - a slight increase from $280.9 million in the year-ago quarter. But that was below the $285.8 million projected by analysts. Pruitt blamed an 18 percent drop in automotive advertising for the revenue miss.
On the cost side, Pruitt said expenses were higher than expected because of a range of factors, including $2.3 million in stock option expenses, increased pension and medical costs, and higher newsprint prices.
In a note to clients, Lauren Rich Fine, a research analyst at Merrill Lynch, which does not have banking business with McClatchy, said she expects that McClatchy will continue to trade within a narrow range around the $47 it closed at Thursday, as investors wait for it to digest the Knight Ridder acquisition. She also speculated that McClatchy's failure to deliver on some year-over-year cost savings promised in recent months may be because of its focus on the Knight Ridder deal.
"We suspect some of the cost miss could relate to the Knight Ridder acquisition, both costs associated with the bid and distraction due to the bid," Fine wrote.
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(c) 2006, San Jose Mercury News (San Jose, Calif.). Distributed by Knight Ridder/Tribune News Service.
