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SAN JOSE, Calif. - Shareholders of Knight Ridder will gather Monday at a downtown San Jose hotel where they are expected to vote in favor of selling the once-mighty newspaper company to Sacramento-based McClatchy for $4.1 billion. They will meet only a few hundred feet from the company's headquarters where the remaining Knight Ridder corporate employees have been packing up their personal files and photos.
Almost 32 years after Ridder Publications and Knight Newspapers merged to create a publishing powerhouse, Knight Ridder will vanish. It leaves behind a journalistic legacy that includes 85 Pulitzer Prizes, but financially was unable to please investors who forced Chairman and Chief Executive Tony Ridder to sell the company.
"It's certainly sad to leave this place," said Bryan Monroe, assistant vice president for news, who has been a Knight Ridder employee for 19 years, including 11 years at the San Jose Mercury News. "We really have had a good run. Even though the company will no longer be around, I know the legacy of Knight Ridder will live on."
McClatchy will give investors a mix of cash and stock that as of Friday valued their Knight Ridder stock at $61.29 a share. The value of the deal has fallen 8.9 percent - or $400 million - since it was announced on March 13, after a sharp drop in McClatchy's stock, which closed at a new 52-week low on Friday.
The vote to dismantle Knight Ridder will result in McClatchy absorbing 20 of Knight Ridder's 32 newspapers. McClatchy plans to sell the other 12, including the Mercury News and Contra Costa Times, to Denver-based MediaNews Group and other companies.
When the sale is final, even the Knight Ridder sign that has dominated the downtown San Jose landscape since October 1999, becomes the property of McClatchy.
The vote comes a little more than one year after one of Knight Ridder's largest shareholders, Bruce Sherman of Private Capital Management, demanded the company be broken up or sold. The ensuing drama has not only spelled the end of Knight Ridder, but has been felt throughout the newspaper industry where investors have grown increasingly pessimistic.
"There is a major restructuring of newspaper groups, and it's more at the beginning then the end," said Ken Doctor, a former Knight Ridder Digital employee who is an analyst for news at Outsell, a Burlingame, Calif., market research company.
The deal, which includes McClatchy assuming $2 billion in Knight Ridder debt, must be approved by 80 percent of shareholders. McClatchy still has to sign a consent decree promising to sell the St. Paul Pioneer Press - for which it already has a buyer - to satisfy anti-trust regulators requirements at the U.S. Department of Justice. Knight Ridder and McClatchy are confident they will get both in time to file the final merger documents on Tuesday at 4 p.m.
As shareholders gather Monday, here's a look at the implications of the deal:
-Bay Area:
Dean Singleton and his newspaper company, MediaNews, are set to become the dominant force in the Bay Area media landscape.
MediaNews' Bay Area dailies include the Oakland Tribune, Fremont Argus, Marin Independent Journal, Tri-Valley Herald and Hayward Daily Review. In April, the Denver-based company announced it would buy four newspapers from McClatchy - including the Mercury News, Contra Costa Times and Monterey County Herald - for $1 billion in a complicated deal that includes financing from Hearst, which owns the San Francisco Chronicle.
By acquiring the three Knight Ridder papers in Northern California, MediaNews will have a Bay Area circulation of 727,284, according to the latest circulation figures, eclipsing the Chronicle, which has a circulation of 398,246.
The MediaNews portion of the deal is still under scrutiny by federal anti-trust regulators who have requested more information from the companies. The California Attorney General has also been reviewing the MediaNews sale for anti-trust implications and a coalition of Bay Area politicians and the Newspaper Guild have been pressing both state and federal officials to seriously scrutinize the deal.
Depending on the pace of the anti-trust reviews, it is possible McClatchy will own the Mercury News and Contra Costa Times, for a period of time.
-Industry:
Knight Ridder was targeted by PCM's Sherman because, unlike many other newspaper companies, it lacked the protection of a super-voting class of stock that would let family members retain control.
In recent weeks, the shockwaves from the sale have been felt in Chicago, where the Tribune Company announced a massive stock buyback plan to boost its share price, which has been under pressure from shareholders.
That announcement touched off a public fight with several board members who argued the plan was too timid, and that the company should be broken up and sold in pieces.
Even the New York Times, which does have a stock structure that protects it from Wall Street pressure, has come under fire from one major shareholder who has argued that the family that controls its stock isn't responsive to shareholders. One financial columnist even suggested this week the company needs to seek a merger or sale to survive.
-Investors:
Sherman has said publicly that he paid an average of $65 a share for his Knight Ridder shares. But as of Friday, the deal was only worth $61.29 per share.
While Knight Ridder has paid dividends over the years, it appears that Sherman won't entirely recoup his investment, and the value of the deal for other investors - from Wall Street institutions to Knight Ridder employees who hold the stock in their 401(k) accounts - has dropped.
Sherman declined to comment. And while he has publicly expressed satisfaction with the deal in several interviews, others have questioned how well he did.
"He had said before that, based on his average price, he hit a `single,' he didn't hit a home run," said John Morton, an independent newspaper analyst. "I'm wondering now if it's even going be a single."
Sherman now will also become one of the largest shareholders in McClatchy, a company whose own stock has performed poorly in a dismal newspaper sector over the past year.
-Company CEOs:
McClatchy CEO Gary Pruitt has emerged as the biggest winner, because McClatchy will become the country's second-largest newspaper company and he is picking up Knight Ridder for a price analysts consider a bargain.
Knight Ridder CEO Tony Ridder, on the other hand, is losing the company that bears his name.
Ridder, who was publisher at the Mercury News for nine years, moved Knight Ridder's headquarters from Miami to downtown San Jose to be at the center of the Internet revolution, only to see the company sold eight years later.
Ridder said in a March meeting with the Mercury News staff he and his family "are very upset about it. Every family member I've talked to is very upset about it. I've worked for the company for 44 years, and I love it."
Ridder will receive a severance package worth $9.4 million, and has also been given a seat on the McClatchy Board of Directors, which comes with an annual stipend of $35,000.
In that role he'll be working with Pruitt, who will face enormous pressure to deliver on his promise that the new McClatchy, with its focus on high-growth markets, will deliver strong profits.
The company's largest shareholders say they support the deal. And they're impressed that Pruitt has arranged to sell 11 of the 12 papers the company said it would divest for healthy prices.
"We feel it's a terrific deal for Gary and McClatchy," said John Miller, a portfolio manager at Ariel Capital Management, which owns 10.74 percent of McClatchy's stock.
But apparently not all shareholders agree.
McClatchy's stock price has dropped 14.8 percent since the deal was announced - and it's down 35.7 percent over the past year. Some analysts have noted that the hefty debt McClatchy is using to finance the deal plus the dilution from issuing more stock has made some investors flee.
And the company suffered another blow when Gannett and Tribune said they would likely exercise their right to buy back Knight Ridder's 33 percent stake in their joint online job site, Careerbuilder.com.
Although McClatchy could receive as much as $600 million, the site is considered one of Knight Ridder's most valuable assets and could force Pruitt to find another online partner.
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(c) 2006, San Jose Mercury News (San Jose, Calif.). Distributed by Knight Ridder/Tribune News Service.
