Could Silicon Valley's turnaround be tossing a wild card into Knight Ridder's* sales talks? Joint Venture Silicon Valley recently released data showing the first job increase -- just 2000 jobs 2005 over 2004 -- in four years. Most importantly the report pointed to a rosier job and regional economy picture going forward.
The San Jose Mercury News had proclaimed itself "the newspaper of Silicon Valley" in the wild days of burgeoning growth in the valley. That growth produced the highest household incomes in the country and the highest property values. They also produced unprecedented classified revenue, as the Mercury News at one point ran more classified lineage than any other newspaper in the country. Much of that high-priced lineage was for recruitment, as the tight job market produced columns and columns of job ads.
The burst Internet bubble first drained that revenue. Short time-on-market limited real estate revenue. craigslist, launched out of San Francisco, then compounded the Mercury News woes. craigslist has grown revenue that some estimate at $20M a year, largely from recruitment. In addition craigslist has made mincemeat of the "for sale" merchandise ads, largely replacing a paid marketplace with a free one.
Wall Street analysts, picking through KR data, have estimated recent Mercury News margins at 8%, well less than half of what they were pre-bubble.
As KR execs made presentations to bidders, those bidders were surprised at the "optimism" of the numbers. That optimism is partly fueled by a sense that Silicon Valley is upwardly trending once again, and that the Mercury News will participate in that upside, craigslist and other Internet competitors notwithstanding.
Let's also consider the other laggard KR market, Philadelphia. Hugely important because it is the top revenue producer, Philly saw its margin drop to 9%. We haven't seen a lot of press about an improving Philly regional economy, but one recent Philly Fed report does point to a long-awaited manufacturing growth.
Why would a rebound, even a modest one, in these markets potentially be so significant?
Consider Morgan Stanley's estimate of KR by-market margins overall:
San Jose Mercury News, 0perating margin of 8.0% on revenue of $235,000,000, $18,000,000
Philadelphia Inquirer & Daily News, operating margin of 9.0% on revenue of $520,000,000, $46,800,000
St. Paul Pioneer Press, op eating margin of 10.0% on revenue of $121,000,000, $12,100,000
Contra Costa, op eating margin of 18.0%
Charlotte, op eating margin of 20.5%
Akron Beacon Journal, op eating margin of 21.0%
Miami, op eating margin of 22.0%
Fort Worth, op eating margin of 24.0%
Kansas City, op eating margin of 26.0%
All others (Including papers acquired in 2005 from Gannett), op eating margin of 26.4%
Knight Ridder margin (before corporate expenses of $70 million), 19.4%
So, overall, KR's new estimates -- and bidders estimates of those
estimates -- may be giving a headache to all those trying to figure out
just what the company is worth and what they are willing to pay for it. And that will make the question of who's willing to bid how much, and whether the board will find that number acceptable, more intriguing.
*Disclosure: Ken Doctor is a retired Knight Ridder journalist and retains financial holdings in the company.