LEE TO BUY PULITZER FOR $1.4B -- 131/2 TIMES CASH FLOW Iowa publisher to become industry's 7th-largest, with 1.7M copies daily.

And then there were 12.

With its planned acquisition of Pulitzer Inc., Lee Enterprises Inc. reduces the total number of publicly traded U.S. newspaper companies by 7.7 percent, making Lee the fourth-largest newspaper publisher in the country by the number of titles and the seventh-largest in terms of circulation -- which would be a combined 1.7 million daily and 2 million on Sundays.

Lee and Pulitzer said last week that their respective boards had voted unanimously for the acquisition, valued at $64 a share, or $1.46 billion. Over the previous 13 weeks, the stock had traded at an average $61.66.

The deal works out to about 131/2-times operating cash flow for fiscal year 2004. Both, said Lee, "are in the range of other major newspaper stock purchases in the last five years."

It is anticipated that with the addition of Pulitzer papers, Lee's annual revenue will rise about 50 percent, to $1.14 billion.

Lee said that the transaction would hit earnings per share by about a dime in fiscal 2005 (which for Lee ends Sept. 30) and the company expects earnings per share to drop 10-11 percent in 2006. The company said that free cash flow would increase about 50 cents for the fiscal year 2006.

Deutsche Bank and SunTrustBank will be Lee's lead lenders, providing a $450 million line of revolving credit as well as $1.1 billion in seven- or eight-year term loans at floating rates. Lee said that the agreements give the company good operating flexibility and that repayments in the early years of the agreements are "modest."

"An agreement of this nature would not have been possible without the strong cash flow generation our company has historically demonstrated," Lee wrote in an informational hand-out for investors.

Further, the company said that it may "consider other financing opportunities in the long-term debt market or in the equity or equity-linked market.

"Nothing however," the company wrote, "is needed or required. We are comfortable with our business and our balance sheet."

With the exception of just one paper, since its acquisition two years ago of Howard Publications, the 114-year-old Lee, based in Davenport, Iowa, has a portfolio similar to that of Pulitzer, with a mixture of smaller dailies and weeklies in the heartland, and with a toehold or two in some metro markets.

The decidedly different piece of Pulitzer is its flagship paper, the St. Louis Post-Dispatch, as well as its 50-percent interest in the joint operating agreement in Tucson, Ariz. At 286,310 circulation, the Post-Dispatch will become Lee's biggest paper, and the 100,824-circulation Arizona Star will become the company's second-largest paper. The 90,741-circulation Wisconsin State Journal, formerly Lee's largest paper, will now be third.

Lee officials sought to calm nerves both inside the paper as well as in the investment community by reminding them that Lee's chairman, Mary Junck, is the former publisher of the Baltimore Sun and later in her career managed all of Times Mirror's papers on the East Coast, which included not only the Sun but Newsday as well. Earlier in her career, Junck was a top executive with Knight Ridder for many years.

Lee said it did not anticipate any quick management changes at the papers, though it did see a reduction of corporate staff. Further, the company said that it anticipated spending about three percent or less of total revenue on capital improvements in the years to come. It said that it had an independent consultant evaluate the press and production facilities at Pulitzer's three largest papers.

"The consultant confirmed that Pulitzer has done a good job of maintaining the physical needs of its properties, as does Lee. At some point in the future, those operations will need to be upgraded again, but the time horizon for those events appears to be well into the future," Lee wrote.

The acquisition will put Lee into some attractive markets where it has had no previous presence, including Arizona and Central and Northern California. Conversely, in markets like Wisconsin, Illinois and Oregon, both companies have properties that can now begin to share infrastructure.

"We're delighted that [Wisconsin's Daily News in] Rhinelander will become part of the company, and we think they will make a significant contribution to Lee's future," James Hopson, publisher of Lee's Wisconsin State Journal told his own newspaper.

Though taking a great deal of trouble to compliment the existing management, Lee indicated that by implementing its best-practice policies in both advertising and circulation, it expected it would be able to grow the Pulitzer papers.

Lee plans to implement its "blitz team" or "SWAT team" approach to ad sales at the Pulitzer papers. The company has built up a mix of combined sales training programs, which are complemented by "intensive prospecting and team-selling in specific categories."

It's pretty clear that right now if you want to grow your publicly held company at any good pace, you're either going to acquire public (like Lee and Pulitzer) or independent (like Journal Register and 21st Century) groups -- or, you're going to be buying a lot of weeklies and other non-dailies (like Lee and Pulitzer had been doing -- before this merger anyway). As newspaper broker John Cribb wrote in January's Publisher's Auxiliary, "There are few daily newspapers to purchase, and the competition to buy these properties is intense. This means that many buyers are unable to actually make acquisitions of dailies." While weeklies aren't a seller's market by any stretch of the imagination, a good weekly in a market in which a daily wants a foothold can expect to bring the same kind of price -- 12 times cashflow -- that you'd expect to get for a daily.