PE firms lose Knight Ridder bid, but btill like media

Target: Knight Ridder (NYSE: KRI)

Buyer: McClatchy Co. (NYSE: MNI)

Price: $6.5B

Financial Advisor: Credit Suisse for McClatchy; Goldman Sachs & Co. and Morgan Stanley for Knight Ridder

Underwriter: Bank of America, JPMorgan Chase Bank

Legal Counsel: Wilson Sonsini Goodrich & Rosati for McClatchy; Wachtell Lipton Rosen & Katz and Skadden Arps Slate Meagher & Flom for Knight Ridder

Unsuccessful Private Equity Bidders: Bain Capital, Hellman & Friedman, Oak Hill Capital Partners, Texas Pacific Group and Thomas H. Lee Partners

Sacramento, Calif.-based newspaper operator McClatchy agreed to pay approximately $6.5 billion for San Jose, Calif.-based Knight Ridder. Cash and stock account for $4.5 billion of the transaction and the transaction also takes on $2 billion in debt.

McClatchy’s bid beat out one submitted by Bain Capital, Hellman & Friedman, Oak Hill Capital Partners, Texas Pacific Group and Thomas H. Lee Partners. While all the firms either did not return calls or declined to comment, one person familiar with the transaction told Buyouts that McClatchy’s bid, which was significantly higher and that the private equity consortium’s bid, was in the $5 billion range and all cash.

McClatchy said that part of the deal will include its sale of 12 Knight Ridder newspapers, including the Philadelphia Inquirer and Philadelphia’s Daily News, the San Jose Mercury News and the St. Paul Pioneer Press.

One observer familiar with the deal said that the private equity firms involved in the bid to acquire Knight Ridder would not be interested in any of the 12 newspapers being offered for sale by McClatchy. The 12 papers are too widely disbursed and are smaller assets more likely to be acquired by other newspapers that operate in their respective regions.

McClatchy is financing the acquisition with a $3.75 billion bank debt facility and has commitments from Bank of America and JPMorgan Chase Bank to underwrite the financing.

The private equity firms are definitely sprending their wings, showing they will step up and do major deals in the information business…

Baran Rosen

James Rutherford, an executive vice president and managing director of private equity firm Veronis Suhler Stevenson (VSS), says that it doesn’t surprise him that the private equity consortium was out-bid by a strategic buyer. “It’s the nature of the business,” he says. “There are a good number of strong strategics in this space and they have a consistent appetite to buy.” He adds that most large media deals of this type, particularly in the newspaper business, have been made by strategic buyers. The newspaper strategic buyers have strong appetites for those and have strong synergies that should enable them to pay more money.”

But while the private equity consortium lost out in its bid for Knight Ridder, private equity firms are stepping up to the plate when it comes to moving on opportunities in the space.

“The private equity firms are definitely spreading their wings, showing they will step up and do major deals in the information business,” says Baran Rosen, president of Whitestone Communications, an M&A advisory firm that focuses on media deals. He says that private equity firms will continue to be strong media buyers, and will probably account for between 40% and 50% of media M&A activity in terms of dollar value. He says that private equity deals will account for about 20% of deal volume but will be concentrated on larger deals.

According to a recently released study by PricewaterhouseCoopers, current activity suggests that 2006 will have the highest deal activity in at least the past six years in U.S. entertainment and media industry. One of the factors the report cites is the increase in private equity investments in entertainment and media companies. The report says that private equity is active across all sectors of entertainment and media and that private equity financed more than 23% of all entertainment and media deal value and 19% of deal volume in 2005.

“If you think about the stuff going on in radio, yellow pages and newspapers, the debt is plentiful and there are great stable cash flows and it’s exactly the kind of business you want be in from an LBO point of view,” says Jay Jester, a managing director with Audax Group. “You’ve gotten far enough away from a lot of the instability created by the tech bubble. These are good solid cash flow assets.”