McClatchy Rides On Population Growth Plan
By SETH SUTEL, AP Business Writer
Fri Mar 31, 2:35 PM ET
NEW YORK - The McClatchy Co.'s strategy of cherry-picking newspapers in rapidly growing cities was long seen as a good idea for the mid-sized publisher, but not necessarily a model for the rest of the industry.
But now that McClatchy is vaulting into the big leagues with its acquisition of the much larger Knight Ridder Inc. — and keeping only 20 of its 32 newspapers in fast-growing markets — many are wondering if that will now become the new gold standard for valuing newspapers.
That topic is sure to be much discussed at the newspaper industry's annual convention, which gets under way Sunday in Chicago.
So far, Wall Street has not focused heavily on a company's presence in growth markets in assigning valuations. According to a recent report from Morgan Stanley analyst Doug Arthur, McClatchy's stock is trading at around 7.1 times estimated 2006 earnings, about even with Tribune Co. at 7.3 times and below industry leader Gannett Co. at 7.6 times.
That partially reflects the decline in shares of Sacramento, Calif.-based McClatchy since the $4.5 billion takeover of Knight Ridder was announced on March 13. Analyst attribute the share decline to concerns about whether the sale of the San Jose Mercury News, The Philadelphia Inquirer and 10 other Knight Ridder papers will generate enough cash to make a big dent in McClatchy's post-takeover debt, which will include $2 billion in assumed debt from Knight Ridder plus a $3.75 billion bank loan.
McClatchy took pains to point out that while the papers being divested didn't meet its own acquisition criteria, which take into account other factors besides projected household growth, they were quality assets which were attracting wide interest from potential owners.
McClatchy hasn't commented on which parties have placed initial bids for the papers, although a union representing workers at most of the papers has put in a bid for all of them, and Gannett and MediaNews Group Inc. have both said they were having a look.
Being in growth markets has always been important, but newspapers have myriad ways of generating big profits even in slower-growing markets, including owning clusters of papers to save on costs and going after burgeoning suburbs with zoned editions. Plus, being in fast-growing markets has challenges of its own, such as keeping competitors at bay.
Still, being in a growing city is usually better than the alternative. "Everybody wants to buy growth markets," says media economist Miles Groves. "Maintaining your franchise and your readership and advertising base is much harder in a declining or flat market than it is in a growth market."
John Miller, a portfolio manager with Ariel Capital Management, which has stakes in several newspaper companies, says investors may start to consider growth characteristics as a new metric of value. To date, he says, investors tend to focus on other factors including clustering, household penetration and readership.
In the meantime, as other newspapers are put up for sale, location in a growth market is sure to be high on the minds of potential acquirers, says longtime industry analyst John Morton, an independent consultant based in Silver Spring, Maryland.
"There are only so many growth markets," Morton says. "As concentration of ownership goes forward, you'll see future acquisitions of newspaper chains go pretty much the way this one did: The buyer will keep the growth markets and discard the rest."
The Knight Ridder sale was something of a special case because it was forced to put itself up for sale by its largest shareholders, and didn't have a separate class of supervoting stock to keep control with the founding families, as is the case with several other publishers such as The New York Times Co.
But other newspapers are bound to come to market, and when they do, the rising prominence of McClatchy's growth-market model will be keenly considered. And among the large, publicly held companies, there are often great differences in the growth characteristics of the cities in which they own papers.
Take Tribune Co., which has come under pressure recently from investors concerned about its prospects for growing newspaper revenues. According to demographic data crunched for The Associated Press by SRC LLC, the same company in Orange, Calif. whose technology McClatchy licenses to make its own analyses, several of Tribune's papers are in markets growing slower than the national average, as measured by projected household growth.
Baltimore, Long Island and Stamford, Conn. all show slower than average growth, according to SRC's data, but Orlando, Fla., where Tribune owns the Orlando Sentinel, shows very fast growth.
Likewise, several cities with papers owned by E.W. Scripps Co. also register sharply varied growth, with Naples, Fla., where Scripps owns the Naples Daily News, showing extremely fast growth, while Abilene and Wichita Falls, both in Texas, are much slower.
Some other newspaper markets that show big projected household growth include Denver, with newspapers owned by Scripps and MediaNews Group Inc.; Phoenix, where The Arizona Republic is owned by industry leader Gannett; and Bloomington-Normal, Ill., where Lee Enterprises Inc. owns The Pantagraph.
However, there aren't that many growth markets to go around. According to SRC data, only about one-third of the cities defined as metropolitan statistical areas by the federal government show the kind of supercharged growth that McClatchy has in its cities, which are forecast to add households at a rate that is about 50 percent faster than the average rate of growth in the rest of the cities.
Newspapers can still be very profitable in slower-growing markets, especially if they are part of a cluster than cuts down on back-office costs and allows area-wide advertising sales. Other newspapers also grow by expanding into new areas with zoned editions.
Supercharged market growth can also present its own challenges. In Las Vegas, the publisher of the Las Vegas Review-Journal says keeping up with that city's growth has required constant change — adding staff to cover new school districts; following readers as they migrate to suburbs; and coping with expanding delivery routes.
Over the past 13 years, the family-owned paper has launched 11 weekly newspapers to keep up with the sprawling growth, and it now also owns a business weekly, a Spanish-language weekly and an alternative weekly, all to make sure it doesn't get beat out by a hungry competitor.
"You need to reinvest to stay on top of a growing market," says Sherman Frederick, publisher of the Las Vegas Review-Journal and president of Stephens Media Group, which also owns dailies in several other states. "If you're a daily newspaper and you don't do the raft of ancillary products, especially in a growing market, you're making a big mistake."
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