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Knight Ridder's third-largest shareholder demands sale

November 2005

Knight-Ridder's third largest shareholder demands sale  


By Chris O'Brien
Mercury News  

Nov. 3rd 2005.

Knight Ridder's third-largest shareholder demanded on Thursday an immediate sale of the San Jose company as the newspaper chain weighed its options for responding to a growing shareholder revolt. Harris Associates, a Chicago-based investment fund which owns 8.2 percent of Knight Ridder's stock, told the company's board it should find a buyer "immediately.'' In addition, the chain's second-largest shareholder, Southeastern Asset Management, which owns 8.9 percent of the stock, said it planned to become more vocal about Knight Ridder's strategy and requested a meeting with the board. Knight Ridder owns the Mercury News.

Meanwhile, a source confirmed that Knight Ridder has hired investment bank Goldman Sachs to study the various strategies it could pursue.

The company retained the bank on Tuesday, the same day Private Capital Management, a Naples, Fla. money management firm that owns 19 percent of Knight Ridder's shares, wrote the board asking it to pursue a sale.

With shareholders who control more than 35 percent of its stock now speaking out, observers said Knight Ridder Chairman and CEO Tony Ridder needed to seriously consider the request to sell. If Ridder decides against a sale, observers said he'd need to respond quickly by offering an alternative strategy and move to build support among other shareholders.

Either way, analysts said the company is clearly vulnerable to a takeover bid and could be facing a vicious battle that could drag on for months.

"I assure you that all over this country, there are people at media companies and private equity firms crunching numbers and figuring out where they would be on buying this thing,'' said Ken Marlin, a managing partner at Marlin & Associates, a mergers and acquisitions firm in New York. "Essentially, PCM has put this company into play.''

At this point, the next move belongs to Ridder and the board. The company so far has been mostly silent except for a brief statement it issued Thursday:

"The Knight Ridder board of directors is always interested in the views of its stockholders. The board takes its fiduciary duties seriously and will respond in due course.''

Financial analysts who follow Knight Ridder have been split over the prospects for a sale, with some wondering how attractive the nation's second largest newspaper chain would be. Some analysts have said the mostly likely buyers would be either the Gannett or Tribune companies.

But the drama has clearly excited investors, who drove Knight Ridder's stock up $2.47 on Thursday to $61.55. The stock is up 15 percent in the two days since PCM filed its letter with the U.S. Securities and Exchange Commission.

Experts on shareholder activism said the public declarations by Knight Ridder's stockholders required the company to seriously study the prospect for selling.

"The board has to decide whether to sell,'' said Charles Elson, director of the University of Delaware's Corporate Governance Center. "Thirty-five percent is a pretty big number. They have to decide if that's the right course or they may have a shareholder revolt.''

Knight Ridder's board already has been trying to respond to PCM's concerns about the stock price. Since PCM met with the company's board in July, Knight Ridder increased its dividend, initiated a large stock buy back, and announced staff cuts.

Douglas Arthur, a Morgan Stanley analyst who upgraded the stock this week, said he wondered whether Ridder, who is 65, had the energy for a protacted battle.

"I think to Tony's credit, he's been very shareholder friendly,'' Arthur said. "This is one of the most aggressive buyback programs in the industry. I think they get high marks for caring about shareholders. But the earnings and the stock market have not responded.''

If Knight Ridder rejects the call to sell, analysts said it would have to come up with an alternative plan that provides detail about its strategy to raise the stock price.

In that case, the company still has options. Analysts noted the company could increase the stock buyback plan or consider deeper cuts in expenses and staffing. The board could also attempt to buy the shares of dissenting stockholders, break up the company and sell some pieces, or explore ways to take the entire company private.

Knight Ridder could also seek out a friendly private investor or investment group -- a white knight -- to buy out dissenting shareholders.

Finanlly, the company could seek a settlement with PCM that gives the fund some seats on the board, which may or may not include Ridder himself stepping aside or other management changes.

If Knight Ridder's board chooses one of these strategies, it will have to aggressively sell it to shareholders. About 94 percent of Knight Ridder's stock is owned by institutional investors who are going to primarily be looking for the option that promises the best return on their money, analysts said.

"It's certainly possible for the current management of the company to get religion and say, `We have a plan,' '' Marlin said. "They'd have to go on a roadshow and convice the shareholders.''

If dissident shareholders aren't satisfied with the alternatives, Knight Ridder is probably looking at a nasty public proxy fight leading up to its annual meeting in April. At the time, three of its 10 directors would be up for re-election and dissident shareholders would likely propose an alternative slate.

With almost 28 percent of the company's shares already favoring a sale, the chances of such a victory would be good. And that in turn would likely lead to management changes, Elson said.

Knight Ridder publishes 32 daily newspapers in 29 U.S. markets, with 8.5 million readers daily and 11 million on Sunday.

Copyright 2005 Knight Ridder.

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