McClatchy's acceptance this week of a reduced share in investments held by Tribune/Knight Ridder/Gannett (TKG) marks the end of a noted newspaper partnership among heavyweights. Under the deal, Tribune and Knight Ridder exercised their rights to buy out Knight Ridder's successor, giving McClatchy $310 million to drop its share of CareerBuilder and ShopLocal from 33 percent to 15 percent, and its shares in Topix, partially owned by management, down to 11.25 percent.
The agreement values CareerBuilder at $1.55 billion, ShopLocal.com at $85 million and Topix.net at $72 million. McClatchy will use the money to retire debt from its purchase of Knight Ridder; Tribune and Gannett, on their end, will leverage their increased shares to heavily invest in CareerBuilder in the U.S. and overseas — something McClatchy may have been reluctant to do.
Mixed feelings go with the deal — and not just because of the money, which may not have been enough. TKG had the potential to drive a new era in the newspaper industry. For the past couple of years, whenever someone had an industry cure — business directories, social networks, contextual search, whatever — winning support from TKG was always the most desired result. Sometimes, however, it meant flying on separate trips to Chicago, San Jose and northern Virginia. TKG, by design, never had a central office.
TKG, of course, could have been held together, with McClatchy taking Knight Ridder's role. But the partners had somewhat conflicting agendas. Moreover, McClatchy had less leverage with the other partners after disposing of key papers in Philadelphia and Northern California. (In fact, the first move of the new owners of Philadelphia Media Holdings was to quit CareerBuilder for Monster.)
Still, thoughts were entertained of how to keep TKG alive as "TMG." McClatchy CEO Gary Pruitt was reported to have put together a plan to sell some of the Knight Ridder shares to several additional newspaper companies to form a broader industry consensus, while giving McClatchy the cash it needed to pay the banks. But as it turns out, Tribune and Gannett, scarred by the lessons of past newspaper consortia disasters like CareerPath and NCN, were determined to go their own way, with McClatchy taking on a minority role.
Did McClatchy settle for too little? Pruitt is considered a financial whiz, but questions have been raised, in particular, as to CareerBuilder's $1.55 billion valuation, especially given Monster's $5.17 billion valuation. It is kind of baffling, given that CareerBuilder has surpassed Monster in several key criteria (i.e., postings and revenues). Last quarter, CareerBuilder generated $172 million in market revenues in the U.S., $9 million more than Monster's take in the U.S. and Canada combined.
Jupiter analyst Niki Scevak, in a toughly worded, "R" rated post titled "Highway Robbery at CareerBuilder," calls CareerBuilder one of the underappreciated jewels of the Internet. He argues that "it is absolutely mind boggling that McClatchy could have made such a strategic mis-step."
Some financial analysts who closely followed the deal agree that the valuation was low. But the discrepancy is not as great as it appears when you take out Monster's worldwide revenues and its career education and promotions divisions, which account for a small part of its value but a significant share of its growth scenario (think about Kaplan's incredible effect on The Washington Post Co.).
Editor and Publisher notes that Prudential Equity Research analyst Steven Barlow estimated CareerBuilder to be worth around $2 billion, based on the valuation of Monster.com with a market cap of $5 billion. He pointed out that MediaNews Group, which has assumed several Knight Ridder properties in Northern California, was shut out of the process — a different outcome than the research firm expected.
Merrill Lynch analyst Lauren Rich Fine estimated CareerBuilder's value at $1.7 billion, also partially based on Monster. E&P reports that Fine mentions the disparity "likely lies in the profitability of the two companies." Monster's operating margins are just over 20 percent while CareerBuilder, which has spent very heavily to win market share, is still in the red.
Perhaps Monster is tremendously overvalued? I don't really have the answer. In any case, Pruitt said in a company press release that McClatchy got what it needed out of the deal. "The transactions for CareerBuilder, ShopLocal.com and Topix.net highlight the value of the equity investments we acquired from Knight Ridder, which we now believe have a value of $1 billion compared to the $500 million we initially assigned to them.
"Our newly announced partnership in CareerBuilder, and the use of the proceeds of these transactions to reduce our debt, position McClatchy extremely well as we move aggressively to apply our tested operating strategies to all McClatchy newspapers," added Pruitt. "Our attention now turns entirely to operating and growing our leading local media businesses in 30 premium markets around the country."