Knight sold as industry struggles

McClatchy Co. said yesterday it would buy much bigger Knight Ridder Inc. for $4.5 billion, ending one of the last family dynasties in a newspaper industry that is being turned upside down by the Internet and America's changing reading habits.

While the sale will create the nation's second largest newspaper chain, it won't be built on the kind of competitive, big-city journalism with foreign and national bureaus that distinguished the big chains of the past, but rather on a brand of local news where McClatchy sees its niche. The company said it can make money in smaller markets where it can maintain a position as the dominant news and advertising source.

McClatchy plans to quickly sell a dozen papers it will acquire from Knight Ridder -- including two of the biggest, the Philadelphia Inquirer and the San Jose Mercury News -- and a handful of unionized papers in rust-belt cities.

McClatchy instead will concentrate on other prizes in the acquisition, in particular the Miami Herald, the Kansas City Star, the Fort Worth Star-Telegram, and 20 smaller Knight Ridder papers that it says are market leaders in growing cities -- Sun Belt locales like Charlotte, N.C., Columbia, S.C., and Macon, Ga. The two companies don't own any newspapers in the Boston area. McClatchy said there would be no layoffs because of the deal.

Although advocates for strong newsrooms fret over ownership consolidations, there may be a positive outcome for readers in this case, because McClatchy has a better reputation for quality journalism than Knight Ridder has in recent years, said Bryce Nelson, a professor at the University of Southern California Annenberg School of Journalism. He cited a high-profile incident at Knight Ridder's flagship, the Mercury News, where the publisher quit in 2001 to protest budget cuts.

''Knight Ridder has been on a journalistic decline," Nelson said.

The $4.5 billion price is much less than what newspapers fetched in years past and was even smaller in relative terms than what Lee Enterprises, a local news and free-circulation shopper specialist, paid for the Pulitzer chain last year.

In another sign of the soft market, there was some interest from a group of private equity firms, including Bain Capital, that never produced a formal bid. Analysts interpreted that as a lack of confidence in the industry.

But Gary Pruitt, chief executive of McClatchy, said, ''It's truly a chance for McClatchy to do more of what it does best."

McClatchy also is chasing a bigger share of the nation's exploding online audience, which newspaper executives view as both their bane and potential salvation. The purchase gives the larger company a chain of Internet sites called the Real Cities network, with 110 sites that had 29 million site visits in January 2006, and a one-third stake in CareerBuilder.com, a Web-based employment classified venture with Gannett Co. and Tribune Co.

The changes in daily newspapers are part of a trend toward consolidation in a mature industry.

Boosting revenues in the face of declining circulation and broadcast and Internet competition is difficult, so executives and investors are turning to mergers to create value, said Colby Atwood, vice president of Borrell Associates, a Portsmouth, Va., media research firm.

''Newspapers are managing in a declining industry. They can stay profitable for a long time, but they are going to be smaller, and they are going to look different," Atwood said. ''They will not be a mass medium of consequence in the future."

Although CareerBuilder.com and other Internet opportunities are attractive to McClatchy, Atwood said, he cautioned against seeing the Web as a salvation.

''There's not going to be enough room in the online lifeboat for everyone who is in the newspaper industry today," he said.

Uncertainty and weak stock performance triggered the Knight Ridder sale in the first place, after several big investors led by Private Capital Management said last year stockholders would be better served by cashing out.

That created an opening for McClatchy, a smaller newspaper chain that is eagerly swallowing a bigger fish. McClatchy had sales of $1.2 billion in 2005, compared to Knight Ridder's $3 billion. After McClatchy sells the dozen papers, the combined dailies will have a circulation of about 3.2 million.

''It's not a good time to sell a newspaper company," said John Morton, president of Morton Research Inc., in Silver Spring, Md.

He cited a disconnect between stock prices and actual performance in an industry that averaged 19.2 percent profit margins in 2005.

The sale and subsequent spinoffs will establish McClatchy as a stronger player in small and medium-sized newspapers, with a fresh toehold in established websites. McClatchy built its chain on the back of medium-size California papers in Sacramento, Modesto, and Fresno.

Knight Ridder shareholders will receive $67.25 per share, which represents a 25 percent premium over the preannouncement stock price.

The Newspaper Guild-Communication Workers of America said it would be interested in buying at least eight of the 12 newspapers in the deal that McClatchy wants to sell. All eight have workers represented by the union.

There also was speculation yesterday that Dean Singleton's MediaNews Group, which expressed interest in the Knight Ridder deal but did not emerge as a public bidder, might be interested in some of the papers being spun off. Singleton's office did not respond to a request for comment.

Based on revenue, McClatchy paid less for Knight Ridder than prices paid by other media companies in recent deals.

They include the Dow Jones & Co. purchase of MarketWatch.com, The New York Times Co. purchase of About.com, and Rupert Murdoch's News Corp.'s purchase of MySpace.com -- to name a few recent examples of media Internet deals, said Chuck Richard, vice president and lead analyst at Outsell Inc., a media research firm in Burlingame, Calif.

''Knight Ridder is not a giant of online presence," Richard said. ''The newspapers have a challenge to accelerate their monetization of the audience that has moved online."

Knight Ridder has not met that challenge, said Richard, evidenced by the lack of private equity investment interest in the chain.

''That is a vote of no-confidence among the private equity groups," he said. ''They could care less if they manufacture ball bearings or print newspapers, as long as the cash flows are there."

Christopher Rowland can be reached at crowland@globe.com.