McClatchy preparing to go private?
The signal that something may be afoot is contained in a brief document filed at 5:01 p.m. yesterday at the Securities and Exchange Commission. The Friday night filing states chief executive Gary Pruitt resigned Wednesday as one of the four directors of the family trusts that collectively control 41% of MNI’s stock. Long-time company director Leroy Barnes, Jr., a retired utility executive, is replacing Gary.
Gary would have to step down as a trustee if the family were preparing to buy back the battered public shares of the company. That’s because a chief executive would not be viewed as properly representing the interests of all shareholders if he also sat on the board of a group of insiders trying to acquire full control the company for a fraction of what it was worth two years ago.
The SEC filing leaves open every possibility, saying the trusts may “from time to time, increase, reduce or dispose of their respective investments in the McClatchy Co., depending on general economic conditions, economic conditions in the markets in which the McClatchy Co. operates, the market price of the class A common stock, the availability of funds, borrowing costs, other opportunities available…and other considerations.”
(UPDATE 9.6.08: Although McClatchy officials did not respond to emails seeking comment on this post, the Sacramento Bee this evening published an article quoting a company officer as saying the changes at the trust are aimed at "improved governance" and not a "precursor to anything.")
McClatchy’s shares have been trading on the New York Stock Exchange since 1988 but the family has maintained ultimate control of the company through the super-voting Class B shares owned by the four trusts. The company was founded in 1857 during the California Gold Rush.
Although the environment for the newspaper industry is the worst in at least a dozen years, MNI’s stock has been pounded so low that a transaction to take the company private has become financially appealing, so long as you think newspapering is a good business to be in.
While MNI’s public shares were valued at $2.5 billion on the eve what proved to be the disastrous acquisition of Knight Ridder in 2006, its stock has fallen 88% since then to the point that it today is worth a comparatively meager $301.7 million. (MNI has written off three-quarters of the value of the KRI deal.)
This makes the outstanding shares of MNI so cheap that the family, Gary Pruitt himself or anyone else could buy it without putting much more debt on the company than it already is servicing. Depending on the price an acquirer actually paid, the company could come out slightly less leveraged after a going-private transaction than it is today. Here’s the math:
If an acquirer paid common shareholders a 20% premium over the current value of MNI’s shares, the company would have to add only $362 million to its $2.1 billion in debt to swing the deal. If the $59.4 million now spent on annual dividends for common shareholders were used to pay down the new debt, the company would emerge as a private entity owing 4.46 times its operating cash flow in the last 12 months vs. the 4.86x that it owes today. Lenders like the ratio of debt to cash flow to be as low as possible, so they would cheer the reduction.
A post published here in July identified MNI, Gannett (GCI), Lee Enterprises (LEE) and the New York Times Co. (NYT) as candidates for potential going-private transactions. The reason in each case was the deterioration of their respective share prices. Since then, the shares of LEE and NYT have gotten even cheaper. GCI is trading at roughly the same level today as it was then.
A public company taking itself private almost surely would face suits from shareholders angry about the monumental trading losses suffered in the last few years. Shareholders could argue that the companies were being sold too cheaply because management had been misfeasant – or worse.
But the ability to escape the pummeling of the public market – and focus wholeheartedly on rescuing their troubled businesses – are strong arguments for taking a newspaper private, so long as you believe there is a future in publishing.
Not all of the other publishing families would agree. Advance, Blethen, Copley, Cox and Landmark all have put various properties up for sale in one of the worst markets to unload a newspaper in modern history.
While a family bid to take McClatchy private is the most likely reason for Gary’s departure as a trustee, two alternate scenarios come to mind.
One is that Gary himself is leading a group of private-equity investors to buy the company on his own. If that were the case, however, he probably also would have stepped down as CEO, so as to pursue the transaction at arm’s length.
Another possibility is that the family members have become so concerned about the stewardship of the company that they may want Gary out of the room when they have a full and frank discussion about the future of the business, their commitment to it – and whether Gary is the guy to lead it in the future.
Disclosure: I own shares in MNI.