Fitch Downgrades Knight-Ridder to 'BBB-'; Remains on Watch Negative.

CHICAGO -- Fitch Ratings has downgraded Knight-Ridder's (KRI) issuer default rating (IDR) and senior unsecured debt to 'BBB-' from 'BBB', as well as KRI's commercial paper rating to 'F3' from 'F2'. The company's debt remains on Rating Watch Negative. Approximately $2 billion in debt is affected.

The rating action follows the announcement that The McClatchy Company (MNI) will acquire KRI for approximately $6.5 billion, including the assumption of $2 billion in KRI debt. In addition to the assumed debt, McClatchy will fund approximately 60% of the $4.5 billion remaining purchase price with debt and 40% with equity representing a transaction price of approximately $67.25 per share and a enterprise value to EBITDA multiple of 9.5x. McClatchy management expects $60 million in cost synergies. McClatchy intends to sell 12 newspapers it deems as noncore, primarily the larger market newspapers that have faced operational weakness recently. McClatchy management intends to dedicate free cash flow toward debt reduction over the next several years.

Pro forma for the acquisition at close but before synergies or divestiture proceeds, leverage as measured by debt to EBITDA, will be approximately 5.2x. Pro forma for the acquisition, assumed synergies, and net divestiture proceeds, Fitch estimates that debt to EBITDA at the combined company would be approximately 4.0x-4.5x. Free cash flow to debt would be approximately 7.0%-10%. Also, Fitch recognizes there are risks to McClatchy management's plan as it relates to the realization of synergies, selling the noncore assets at acceptable after tax multiples, and successfully integrating the operations. Resolution of the Rating Watch Negative will include a meeting with surviving entity's management to review the financial, operating and integration plans in more detail; Fitch will evaluate the company's financial policies at that time. Fitch believes the combined pro forma metrics are outside the range for a 'BBB-' newspaper company and will focus its discussion on free cash flow generation and management's commitment to exclusively dedicate free cash flow toward debt repayment at the combined entity in the coming years. Given the information disclosed today, Fitch anticipates that the combined entity would not be rated higher than 'BBB-'.

Resolution of the Rating Watch Negative will also incorporate our view that newspaper companies will continue to face challenges intensified by the secular issues facing the newspaper industry. Specifically, Fitch expects there will be continued migration of readers toward electronic media coupled with the logical redirection of advertising dollars toward the media being consumed. Moreover, Fitch anticipates that trends toward increased consumer control and portability of news and a general shift in some markets away from traditional broadsheet newspapers will continue in 2006 and beyond.

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