Maybe it really is the end of the newspaper business. Yesterday, Reuters reported that publisher Knight Ridder (NYSE: KRI ) had bowed to the demands of one of its largest investors and begun exploring "strategic alternatives." Which, in the lingua franca of finance, means it's seeking to be sold.
Who will be its suitor? No one, at the moment. Goldman Sachs (NYSE: GS ) has been retained to change that, or find another financing alternative. That's according to an internal company memo, authored by CEO Tony Ridder. He writes that a sale is possible but that there are a "wide range of possible outcomes," including another restructuring or a transaction that allows the company to persist in its current form.
Don't expect it to be anything other than a sale, though. Private Capital Management, which is a subsidiary of Legg Mason (NYSE: LM ) and Knight Ridder's largest shareholder with a 19% stake, wants nothing less. And it's already threatened a proxy fight to get what it wants. CEO Ridder can't want that for him or his people.
Besides, what alternative is there? The company managed to book higher third-quarter profits only because of a deal with Gannett (NYSE: GCI ) that brought in more than $200 million in one-time gains. And at least one of its major properties, The Philadelphia Inquirer, was among those most affected in the latest downturn in newspaper readership.
Naturally, PCM's activism, and Knight Ridder's renewed willingness to pursue so-called "strategic alternatives," has left frothy investors anxiously bidding up shares, especially over the past week. Now the stock sits at $63.10 per stub. Published estimates for the per-share value of Knight Ridder range from $66 to $100 a share. Don't hold your breath for the latter, but somewhere in the middle is possible, indeed.
Allow me to explain. Analysts expect earnings to expand by 8% over the next five years. That looks terribly optimistic for a business in a struggling industry that saw income from continuing operations drop during the most recent quarter. Better to adjust it to 5% to 2010, in my view (which even then might prove optimistic, given declining circulation figures). This figure represents an ability to hopefully eke out some price increases amid declining circulation, as well as growth in higher-margin online businesses.
Assign a 5% growth expectation for the next five years to the company's $296.2 million in trailing 12-month earnings from continuing operations, and a 15 P/E multiple (which is consistent with recent trends for the company and industry), and we arrive at $76 a stub in five years.
Which, of course, is a guess that could still prove wildly inaccurate. But at least it indicates that there's value remaining and underscores why PCM is so adamant about a sale. I mean, really, is there anything more frustrating to an investor than watching an undervalued stock idle in doldrumsville? Not for this investor. And probably not for PCM, either.
What's black, white, and read all over? Why, it's your related Foolishness, of course:
- Have all the newspapers switched to red ink? It sure seems like it.
- Find out how this all got started.
- Not even venerable New York Times Co. (NYSE: NYT ) can keep up with the times.
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Fool contributor Tim Beyers wonders whether the newspaper business is too much like the airline business. Gulp. Tim didn't own shares in any of the companies mentioned in this story at the time of publication. You can find out what's in his portfolio by checking Tim's Fool profile. The Motley Fool has an ironclad disclosure policy.