Knight Ridder's Happy Ending?

A company with assets like these comes up for sale just once in a lifetime

If the Knight Ridder Inc. (KRI ) sale saga were to have a Hollywood ending, it would look like this: The McClatchy Co. (MNI ) and the New York Times Co. (NYT ) team up to outbid a consortium of private equity firms to buy the company's 32 dailies.

Consider the scenario. Tony Ridder, family scion running a battered company formed by the merger of two family-owned chains, safely steers his properties out of troubled waters and toward a partnership of two family-owned newspaper companies, both of which boast solid journalistic reputations. Ridder's black hat turns white. The Times Co. and McClatchy win industry kudos for blocking a private equity takeover. Sighs of relief from Knight Ridder staffers mean goodwill for contract talks.

The two companies could combine their big-city outlets with Knight Ridder's to create a formidable network to sell ads across the land. At the same time, they could slice some costs, and the Times Co. could extend its brand by funneling its journalism into a host of new properties. Since both McClatchy and the Times Co. have family-controlled stock structures, they would be able to weather, at least in the short term, the drubbing they would take from Wall Street, which likely will frown on newspaper companies doubling down on newspapers.

The companies have investigated the possibility of teaming up on a bid, say some insiders. (Company spokespeople declined to comment.) The Sacramento-based McClatchy, headed by CEO Gary B. Pruitt, is the wild card in the sale process. Onlookers say McClatchy could come up with the expected $6 billion, more or less, needed to win Knight Ridder, but it would mean taking on heavy debt for a company that did just under $1.2 billion in revenues last year. (The Times Co. notched $3.3 billion in revenues in 2005.)

A McClatchy-Times partnership would bring breathing room and a stack of complementary strengths. The Times Co. has big-city (and big-union) bona fides. McClatchy, skilled in operating in smaller markets, could run the 15 smaller Southeastern and California newspapers in the Times's Regional Newspaper Group.

The Times Co. has stressed its flagship's national strategy and could make that footprint bigger by adding Knight Ridder properties in Philadelphia, Miami, Kansas City, Fort Worth, San Jose, Charlotte, N.C., and Seattle (where Knight Ridder owns 49.5% of The Seattle Times). The two companies could wrap McClatchy papers in Minneapolis, Raleigh, N.C., and Sacramento into an ad network, as well. The combined entity would become an industry heavyweight, in both quality and heft. And Pruitt's high regard on the Street might soften market reaction. "It's a workable solution," offers one Street source. Pruitt has "a good rep, and deservedly so."

Some things to note: One, these details are wholly hypothetical. Two, newspaper companies have made small-scale swaps and side deals, but nothing approaching this. And the Times Co. has struggled with its Boston Globe. Adding Philadelphia -- perhaps the prototypical troubled big-city market -- might look like the company is mating two dogs in the hope of creating a pony. Any merger brings strains, and this one's stakes would be high. Group bids for Knight Ridder face a massive tax hit if any properties are sold before several years elapse, says an executive familiar with the terms. And the Times Co. has not always played well with others, as its recent takeover of the International Herald Tribune from longtime partner Washington Post Co. (WPO ) attests.

Much ink has been spilled, here and elsewhere, about the threats newspapers face. But putting information on newsprint and serving it up online is what newspaper people like those running McClatchy and New York Times Co. know how to do. And newspaper people will believe in the medium until the last daily dies. A company with Knight Ridder's assets hits the market once in a lifetime, if that. A newspaper exec mulling the media chessboard knows that Knight Ridder may be the only chance to buy big when the medium's reputation is lowest. In the end, it's almost as much a rescue operation as a land grab.

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By Jon Fine

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