McClatchy: Two years after Knight Ridder buy

Troubled times for McClatchy is the headline for a long (nearly 7,000 words, 48 graphs) artilcle by Dale Kasler on the Sacramento Bee’s busienss pasge on Sunday. It is a good report. Here are a few basic graphs:

The McClatchy Co. has slashed its work force by 20 percent, cut its shareholder dividend in half – and might have to trim some more. In its 151st year, America's third-largest newspaper chain is facing "the biggest challenge in the company's modern history," said Gary Pruitt, McClatchy's chairman and chief executive officer.

Like practically every chain, McClatchy is struggling with a media revolution. Its newspapers, where it still makes most of its money, are losing ground to the Internet, though its combined newspaper-online readership is growing. But because of the insanely competitive nature of the Web, McClatchy's own Web sites can't grow their revenues quickly enough to make up the difference, even as their audiences grow.

To make matter worse, McClatchy is deeply in debt due to its $4 billion takeover of Knight Ridder Inc. in 2006, a deal that Pruitt now describes in much more sobering terms than before.

In an interview last week, Pruitt said it's "too early to tell" whether McClatchy made the right move in buying Knight Ridder. He believes the acquisition will eventually work out, but said the debt load – now $2.1 billion – has put McClatchy in an uncomfortable spot. Investors are nervous. McClatchy's stock has fallen almost 90 percent since the purchase was completed.

"It's hard to claim it's a good deal when you see the stock performance," Pruitt said.

He said McClatchy is facing "the biggest challenge in the company's modern history," even though it's "strongly profitable."

Despite the power of the Internet, he said most of the lost revenue will come back when the economy recovers. But some experts are more skeptical – and predict the industry's struggle will be lengthy.

"It's going to be a long time before the companies are whole and healthy again," said Peter Zollman, a Florida advertising consultant whose clients include McClatchy.

Pruitt said McClatchy has a growth strategy that's actually working – marrying newspapers and the Internet to dominate the audience in each of its local markets. The weak economy, however, has obscured the progress.

The economy overtook Pruitt's plans to downsize the company gradually. He had been reducing head count through attrition and voluntary buyouts for a couple of years, and in January he OK'd a five-year plan to cut staffing some more, from 14,000 to about 10,000.

Then the bottom fell out. The rate of decline in advertising doubled. By August, sales were off 16.7 percent for the year. Profitability fell in half. Although Pruitt said McClatchy isn't in any danger of defaulting on its debt, the downturn began eating into its margin for error.

The cost cutting was stepped up.

"It ended up being a five-month plan," Pruitt said.

In June, McClatchy announced it would eliminate 1,400 jobs, many through the company's first-ever mass layoffs. Last week, the ax fell on another 1,150 jobs. Staffing will fall to 10,500 by the end of 2008. McClatchy also imposed a one-year wage freeze.

Pruitt wouldn't rule out further reductions.

"It may get worse before it gets better," he said.

Because of its heavy concentration in hard-hit California and Florida, McClatchy's revenue is falling faster than most media companies.

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