McClatchy, Lee Chains Next on Newspaper Sales Block?

As another wave of consolidation sweeps the newspaper industry, some analysts are looking at McClatchy Co. and Lee Enterprises Inc. as the next two likely targets.

Already this year, Times Mirror Co. (which owned The Times) has been swallowed by Tribune Co. Last week, Gannett Co. agreed to buy Central Newspapers for $2.75 billion.

The premiums paid for the buyout targets have been rich: The Chandler family trust that controlled Times Mirror got a 95% premium for its shares, relative to the market price; Gannett will pay more than double Central’s trading price before Central’s Eugene C. Pulliam Trust approved a sale.

McClatchy, owner of the Bee newspapers in Sacramento, Fresno and Modesto, and Lee, which publishes smaller papers in the Midwest and Northwest, say they aren’t for sale. But Central and Times Mirror said the same thing a year ago.

Like Times Mirror and Central, McClatchy is controlled by its founding family.

“Someone will say, ‘Look at how the Chandlers are going to make out. Maybe we should look around,’ ” said John Miller of Ariel Capital Management, the second-largest shareholder of Central and an investor in McClatchy.

The Pulliam Trust and the family trust that controls the McClatchy chain are similar, Miller said. He spoke recently with McClatchy executives, who said they are looking at ways to boost the stock price.

McClatchy’s Class A shares (ticker symbol: MNI), at $33.50 on Monday, have risen 9% since June 7, the day before Central announced it was for sale. Lee shares (LEE), at $23.38 on Monday, are up just 3% since June 7.

Newspapers are valued on cash flow, defined as earnings before interest, depreciation and amortization. Central shares traded as low as five times cash flow before the bidding started and will sell for about 11 times cash flow at Gannett’s proposed purchase price.

McClatchy is trading as low as four times cash flow, and Lee is trading as low as six times cash flow, depending on the estimates used.

Of possible buyers, Gannett (GCI) continues to be the top contender, if only because it can afford these companies and is on a buying spree. Already the biggest U.S. newspaper publisher, Gannett announced about $4.6 billion worth of acquisitions in June.

Gannett Chief Executive Doug McCorkindale said last week that the publisher of USA Today will continue to buy properties rather than spend money to buy back stock to boost shares, as it did earlier in the year.

The No. 2 newspaper publisher, Knight Ridder Inc. (KRI), and No. 3 Tribune (TRB) are less likely contenders, analysts say. Tribune is busy integrating the Times Mirror properties, and Knight Ridder Chairman Tony Ridder last week said he doesn’t want to dilute the company’s earnings by making high-priced acquisitions.