• by Ross Fadner , November 3, 2005

Wall Street analysts are speculating on the fate of Knight Ridder, a large newspaper publisher, following a Securities and Exchange Commission filing by the company's majority shareholder, requesting that the publisher be sold.

But they don't see a long list of suitors, partly because the newspaper business isn't a safe place for investors these days. In fact, Private Capital Management, Knight Ridder majority shareholder and author of the SEC filing, cited a 14 percent decline in stock value since July as one of its main reasons for requesting a sale, and made it very clear that it will pursue hostile means of taking control of the company's assets if its demands are not met.

Out of a small pool of potential suitors, the consensus among analysts is that USA Today publisher Gannett Company is most likely to be interested in taking over unsettled Knight Ridder, yet many maintain that a sale to a public company is unlikely.

Deutsche Bank is the most bullish about a sale, having upgraded its rating for Knight Ridder from "sell" to "hold." In a research note, the bank said a sale to another newspaper company is more likely than to a private equity investor.

Deutsche Bank also said Gannett and Tribune Company would be the frontrunners, with Gannett being the more likely of the two--although it said Tribune would be a better fit since it relies more heavily on its newspaper business. If Tribune bought Knight Ridder, the combined company would have newspapers in 15 of the top 31 markets in the country. The bank added that offering "a truly integrated national advertising buy" could be a key component to future growth.

But, as Prudential Equity Research noted in its brief, Tribune "has yet to fully digest the Times Mirror acquisition" it made in 2000. In fact, Tribune recently lost out to a federal court order forcing the company to pay for $1 billion worth of taxes it withheld during that acquisition, causing its third-quarter revenue to plunge.

Prudential said Gannett would be "the most probable candidate" of the newspaper companies, but it believes a private equity investor is even more likely in what it considers a very unlikely sale. "We see few, if any, potential buyers," it said in its note.

Merrill Lynch shared the same view. "A likely buyer list is hard to generate," the financial firm said in its note. As for Tribune and Gannett, "in the past it has been assumed that both Gannett and Tribune would have a strategic interest in [Knight Ridder] and the financial wherewithal to pull off a deal." Again, the firm sees Gannett as the more likely of the two, but remains neutral about that prospect--because Gannett recently replaced its CEO, and the effect that will have is still unclear. It said Knight Ridder's private value is "clearly" higher than its public value.

PCM is an investment firm with assets totaling $32 billion. The private firm has invested pretty heavily in newspapers--approximately 14 percent of its portfolio. The firm is a major shareholder in most of the major newspaper companies: New York Times Company, Gannett, McClatchy, Belo, Lee Enterprises, and Media General. It owns 19 percent of Knight Ridder.

Knight Ridder is the publisher of 32 daily newspapers, including The Miami Herald, The Philadelphia Inquirer, The Philadelphia Daily News, and The San Jose Mercury News.