Newspaper economics a la Strib

The Minneapolis Star Tribune is owned by the California-based McClatchy Company. According to the Wall Street Journal earlier this week, the McClatchy Company has made a substantial offer to purchase Knight Ridder. Knight Ridder is the owner, among other properties, of the St. Paul Pioneer Press and the Philadelphia Daily News. See if you can understand the analysis of Star Tribune business reporters Chris Serres and Mike Meyers in their story supporting McClatchy’s reported offer for Knight Ridder.
On the one hand, McClatchy is seen as applying its acumen to the perpetuation of the newspapers:

Some media analysts are concerned that McClatchy could be biting off more than it can chew, but they are nonetheless rooting for the company to succeed, largely because McClatchy is viewed as having a better handle on how to win and keep readers than most of its peers.
Until last year, McClatchy had seen overall increases in its circulation numbers for 20 years, even as other publishers were presiding over a steady erosion in the number of people who paid to read their products.
If McClatchy can stem the exodus of readers and advertisers at some of Knight Ridder’s largest newspapers, while improving the quality of their journalism, it could dispel an increasingly widespread belief on Wall Street and elsewhere that the newspaper as a means of information is in inexorable decline.

The Star Tribune reporters then offer the following analysis of two competing offers, one made by “a consortium of private equity investors” and one made by a combination of Gannett and MediaNews Group — “two companies known for squeezing costs at their newspapers”:

“I’m rooting for McClatchy because it’s practically the last [newspaper] chain that doesn’t strike dread and disgust in my heart,” said Judy Bolch, professor at the University of Missouri School of Journalism and former managing editor of the News & Observer in Raleigh, N.C., which is owned by McClatchy.
Yet McClatchy would have to borrow a significant amount of money to finance a transaction of this size. The exact amount is unknown because details of the cash-and-stock bid remain secret.
Some analysts believe a sizable new debt load would leave McClatchy with little option but to cut jobs and expenses companywide, sell off some papers or both.
“The question is, how much money will [McClatchy] have left over to invest in these newspapers if it needs so much cash to pay down this debt?” asked James Naughton, former executive editor of the Philadelphia Inquirer.
For newspaper readers, a purchase by a private equity firm would offer the worst-case scenario, many industry watchers argue. The usual approach by such firms is to maximize returns by streamlining operations and then selling off an acquisition three to five years later at a higher price.
“Judging by the way McClatchy runs its other newspapers, it’s unlikely that the company would take a chainsaw to the place like a private equity firm would,” said Barry Lucas, senior vice president at Gabelli & Co., the broker-dealer arm of Gamco Investors. Based in Rye, N.Y., Gamco owns nearly 1 million McClatchy shares.

I think I get it: McClatchy good, private equity firm bad. McClatchy run newspapers, increase circulation, and sell newspapers to reduce debt. Private equity firm run newspapers, cut costs, and sell newspapers to make a profit. What do the new buyers do with the newspapers after they buy them from private equity firms? We can only imagine, but it must be something terrible after the new owner spends all that money on them.
The Star Tribune business reporters continue to zigzag on a question of interst to local readers as their story reaches its conclusion:

However, a McClatchy buyout of Knight Ridder could hurt news coverage in the Twin Cities, many of the analysts believe because their bet is that McClatchy would close down the Pioneer Press, or trim its operations.
“Would the local coverage suffer?” asked Michael Parks, director of the school of journalism at the Annenberg School of Communication at the University of Southern California. “To the extent that they compete now, I think it would.”
Jacqui Banaszynski, who won a Pulitzer Prize as a Pioneer Press reporter and is now a professor at the University of Missouri School of Journalism, said she believes McClatchy would have a difficult time convincing readers that the Pioneer [Press] is anything but an east-side bureau of the Star Tribune under McClatchy ownership.
“McClatchy is a rescue boat, and it’s flying the right flag — they’re one of ours,” Banaszynski said. “There isn’t going to be room for everyone on the boat, there are a lot of icebergs in the water, and it’s not clear where the shore is.”
St. Paul might not be the only target. It is widely believed that McClatchy would move quickly to shut down the Philadelphia Daily News, a tabloid daily in a city dominated by the Philadelphia Inquirer; and consolidate state and national bureaus among some newspapers, such as the McClatchy-owned News & Observer and the Charlotte Observer, now owned by Knight Ridder.

“It is widely believed that” McClatchy will probably close two newspapers “quickly,” one of which offers the only local competition to the Star Tribune, and consolidate operations in others. Fortunately, however, McClatchy won’t cut costs, improve profitability or sell the papers at a profit like a private equity firm would — though it will persuade Wall Street that the newspaper industry is not in decline.
And McClatchy’s “flying the right flag — they’re one of ours.” Which flag? To paraphrase Tonto in the joke, “what you mean ‘ours,’ kimosabe?” I think I get it: unlike the private equity firm, and unlike, I guess, Gannett and MediaNews Group, McClatchy’s different. McClatchy’s in the newspaper business, or something!
JOHN adds: If these people really think that in the future, the main competition to the Star Tribune will come from the Pioneer Press, they haven’t been paying attention.


Books to read from Power Line