McClatchy gambles on print

The N&O's parent company will expand from 12 to 32 dailies, including The Charlotte Observer

The McClatchy Co., corporate parent of The News & Observer, is placing a $6.5 billon bet on the future of the newspaper industry by agreeing to buy the much larger Knight Ridder newspaper chain.

Acquiring a company twice its size is a risk for McClatchy, given that the newspaper industry has been buffeted by declining circulation and a shift in advertising to the Internet.

The deal, announced Monday, enables McClatchy to expand from 12 daily newspapers with a combined daily circulation of 1.4 million to 32 dailies with a circulation of 3.2 million. It also will publish 50 nondaily papers, up from 17.

"Obviously, the McClatchy folks are very optimistic about the midterm and long-term future of newspaper journalism," said Davis "Buzz" Merritt, who is teaching journalism at the University of North Carolina at Chapel Hill this semester. Merritt is a former Knight Ridder editor and wrote a book about the company.

The acquisition reshapes the North Carolina newspaper landscape by putting the state's two largest papers -- The Charlotte Observer and The N&O -- under the same ownership. By purchasing the nation's second-largest newspaper chain, California-based McClatchy also will take over reputable newspapers such as the Miami Herald, Kansas City Star and Fort Worth Star-Telegram.

It's encouraging for the newspaper industry that a company like McClatchy wants to expand its empire, said analyst Edward Atorinio of Benchmark Capital. "It's a business that, if run properly with the right structure, can still make a lot of money," he said. But "it's not without its challenges."

McClatchy is paying a lower price in comparison to what other papers have attracted in recent years, said newspaper analyst John Morton of Morton Research. Some of Knight Ridder's papers are in unattractive markets, which lowered the chain's value, he said.

McClatchy is planning to sell a dozen of the 32 daily papers it is buying from San Jose, Calif.-based Knight Ridder, including papers in major markets, such as the Philadelphia Inquirer and the San Jose Mercury News, which will help it repay debt. "They kept the best of Knight Ridder and are getting rid of the rest," Morton said.

The papers that McClatchy is selling don't fit the company's long-held strategy of acquiring papers in growth markets, CEO Gary Pruitt said in a conference call.

The company projects that the number of households in the markets it is selling will rise 4.8 percent between 2004 and 2009, versus 11.1 percent for the papers it is retaining. Likewise, the cash-flow margins -- one measure of profitability -- for the papers being sold averages 18 percent versus 30 percent for the ones being kept.

"We do not think it will be difficult to find buyers," Pruitt said.

To make the deal a success, Goldman Sachs analyst Peter Appert wrote in a research note, McClatchy must boost the profitability of the papers it is acquiring and fetch attractive prices for the papers it is selling.

Pruitt said the company could boost revenue in a market such as the Carolinas, where it will own seven daily newspapers in the two states, by marketing package deals to advertisers for all the newspapers and the advertising circulars the company distributes by mail.

Knight Ridder put itself up for sale in November after it was pressured by investors upset by the performance of the company's stock.

McClatchy agreed to pay $4.5 billion in cash and stock for Knight Ridder and expects the deal to close in three or four months. McClatchy also is assuming $2 billion in debt owed by Knight Ridder.