Newsflash: Newspapers are not dead!
Or so says the man who just bought Knight-Ridder. So why doesn't he want the Philadelphia Inquirer ?
(FORTUNE Magazine) - Gary Pruitt isn't your typical newspaper company CEO. The 48-year-old boss of McClatchy Co. doesn't golf. He's a surfer with a passion for the Clash and Green Day.
He's also unconventional in another way: Unlike many people in his own industry, Pruitt actually thinks the newspaper business has a future.
As you probably know by now, Pruitt announced back in March that McClatchy, publisher of the Sacramento Bee and 11 other papers, would buy Knight-Ridder (Research), owner of 32 dailies -- including that Pulitzer Prize machine, the Philadelphia Inquirer -- in a deal valued at $6.5 billion.
In one fell swoop, McClatchy would be transformed into the nation's second-largest newspaper company in terms of daily circulation. There has been, of course, a lot of handwringing about the deal. McClatchy agreed to pay $67.25 a share for Knight-Ridder (No. 614 on the FORTUNE 1,000), or 9.5 times Ebitda. That was considerably less than the multiple of 13 times Ebitda that Lee Enterprises (Research) paid in January 2005 for Pulitzer Inc., publisher of the St. Louis Post-Dispatch.
Pruitt has also raised a few eyebrows because he isn't keeping all 32 Knight-Ridder papers. He plans to sell off 12 of them, including the Inquirer and the San Jose Mercury News. So what does that say about the state of the industry?
Is Wall Street missing something?
McClatchy's stock went down after the deal, but Pruitt says Wall Street and other critics just don't get it. He says that Sacramento-based McClatchy is buying incredible assets at a bargain price, for one thing, and that his doubters fail to understand that most local newspapers are the leading media companies in their markets. Local dailies are usually a monopoly, and now they're dominating the Web locally.
"People say, 'Newspapers are dying. They are fuddy-duddy,'" says Pruitt. "Guess what? We are the leading local Internet company in all our markets."
McClatchy's Internet revenues are growing fast. Last year they were $58 million, a 35 percent increase over the previous year. And while Web sales are still only 6 percent of the company's $1 billion in ad sales, Pruitt says the company's Internet revenues will rise to $200 million after the Knight-Ridder deal is consummated, and print will still be there to finance the news operations.
Even Pruitt might concede that McClatchy is no Google (Research) -- its revenues were up only 2 percent in 2005. But McClatchy has done perhaps the best job of any newspaper firm of producing good journalism and robust profits.
In 2005 the Sacramento Bee won a Pulitzer Prize for editorial writing. The same year the company boasted an operating income margin of 23 percent, one of the industry's highest. Until last year McClatchy had also enjoyed two decades of unbroken growth in circulation.
Location, location, location
How does Pruitt do it? Great locations. The Knight-Ridder papers that McClatchy is keeping, for example, are in areas like North Carolina's metro Charlotte -- regions that have home growth rates of 11 percent or so. The ones it is selling -- hello, Akron! -- are growing at only around 5 percent.
McClatchy is also keeping a lid on the labor unions: It is selling the papers with the highest percentage of unionized employees. The Knight-Ridder papers it's keeping have labor-union rates of 3 percent, compared with 63 percent for the ones on the chopping block.
Pruitt still has a lot of work to do. He'll have to pay a stiff tax bill on the papers he sells, so he needs to get top dollar. (The CEO won't talk about the sale process. As FORTUNE went to press, there appeared to be a bidding war developing between the likes of William Dean Singleton's MediaNews and Yucaipa Cos., a Los Angeles investment firm.) Pruitt also has to sell the acquisition to Wall Street, though not too hard -- the McClatchy family blessed the deal and controls the board.
In the end, maybe Pruitt is more worried about the deal and the future of his industry than he admits. The rock and roller in him is thinking about closing McClatchy's annual meeting this year by playing U2's "Vertigo," a song about paranoia and doubt. (Last year shareholders departed to the sounds of Neil Young's "Rockin' in the Free World," a vaguely capitalist anthem, I suppose.) But ultimately Bono is singing about faith.
If the new and improved McClatchy is going to work, Pruitt has got to remain one of the true believers.
Devin Leonard, a senior writer at FORTUNE, can be reached at email@example.com.