Has McClatchy Been Thrown Out At First? (MNI)

Includes: KRI, MNI
by: Douglas McIntyre

McClatchy's (NYSE:MNI) purchase of Knight-Ridder (NYSE:KRI) is beginning to look more harebrained by the day. It is probably too late to get out of the deal now.

McClatchy paid $4.5 billion for its larger rival, taking on $3.75 billion in bank debt for the purchase plus $2 billion in Knight-Ridder debt, according to media reports.

Knight-Ridder has just announced Q1 05 results (See Q1 Conference Call transcript). Revenue came in at $740 million, a slight uptick. Operating profit was $88 million down about 16%. Knight said that the average cost of its debt during the quarter was 6.2%. Expensive.

McClatchy plans to sell twelve of the newspapers it is buying. Ad revenue at these fell .4% during the quarter the while it rose slightly at the papers they intend to keep.

McClatchy's own results for the first quarter were no better. Earnings dropped from $32.2 million a year ago to $27.7 million in 2006. Revenue was essentially flat at $282 million.

The really depressing thing about the reports from the two companies was the decline in circulation. For the first quarter, McClatchy saw daily circulation drop by 2% and Sundays by 4.4%. At Knight-Ridder, daily circulation was down 4.3% and Sundays by 4.4%. Seems like a trend.

Unfortunately, even though both companies are beginning to get traction with online revenue from digital versions of their products, the relentless slide in paid circulation at the papers is simply eroding the revenue base too fast.

The value of the papers McClatchy bought and those they intend to, in turn, sell to reduce debt is attriting, and it is showing up in the stock price.

A year ago, McClatchy's stock price was almost $76. The day before the acquisition, the stock traded at over $53. It has now dropped to just above $44. At least the volume has picked up.

The chances that the McClatchy stock will rise much from here will be based to a large extent on whether they get a good price for the Knight-Ridder papers that they intend to sell off. Given the trends, it doesn't look good.

MNI 1-yr Chart

Douglas A. McIntyre is the former Editor-in-Chief and Publisher of Financial World Magazine. He was also president of Switchboard.com when it was the 10th most visited website in the world, according to MediaMetrix. He has been chief executive of FutureSource, LLC and On2 Technologies, Inc. and has served on the boards of TheStreet.com and Edgar Online. He does not own securities in companies he writes about. McIntyre can be reached at douglasamcintyre@gmail.com.