Is Knight Ridder ( KRI) a good merger arbitrage play? Several traders at hedge funds doubt the deal will materialize and say they're in no hurry to take a bet.

Shares of the newspaper publisher rose 1% to $60.93 Thursday after The Wall Street Journal reported that three private equity firms, Blackstone Group, Providence Equity Partners and Kohlberg Kravis Roberts, were considering a joint bid for the company.

The muted reaction partly reflects Knight-Ridder's 15% run since late October, when several large shareholders started agitating for a sale of the company. But the current price is 13% below the 52-week high of just below $70, hit in early March.

For now, merger arbitragers, who bet on takeovers, aren't embracing the stock, which presumably would be taken out for a price above the current level.

"I don't like to play pre-deals. It's too risky," says Nancy Havens, founder of merger arbitrage hedge fund Havens Advisors. "If the market goes down, you go down twice as much. We previously did it with a fantastic franchise, Gatorade. But here, I would need to see bidders really stepping in."

Haven says she has not ruled out buying the stock, but not until the stories are confirmed. "I think there is accuracy in the rumor. But it's just rumors."

All that is known for sure, another hedge fund manager says, is that Knight Ridder announced last month that it was exploring the possibility of selling the company and that it had hired Goldman Sachs as its adviser. Even after that news, which followed the shareholder comments, the stock rose just 23 cents to $63.10. And since then, it has moved downward. "I am not buying the stock," this manager says.

"We think a deal gets done, but it could take a long time to unfold," says William Drewry, a Credit Suisse First Boston analyst in a research report, who is neutral on the stock.

"The stock has been trading pretty flat in the last couple of weeks," says an analyst at an investment bank. One explication is that the Street does not anticipate a very competitive bid process given the current advertising environment and the struggles faced by the company to remain competitive. Drewry says that the bidding could become "interesting" if instead of other newspaper companies or private equity firms, an Internet company, such as Yahoo! ( YHOO) or Google ( GOOG), entered the mix. "But at this stage, the reality of that seems unlikely," says Drewry.

The stock valuation reflects the poor fundamentals of the company, not so much arbitragers pricing in a potential takeover. "I am not comfortable with the fundamentals of the newspaper business. I'm not in the trade. I do not like to bet on takeovers of businesses that are deteriorating," says Jeffrey Cohen, founder of Saddle Brook, N.J.-based hedge fund Silverado Capital Management.

John Janedis, analyst at Bank of America, notes in a research report that October ad growth for the company continued to be soft and marked the lowest level of ad growth since January 2004.

"I might get in but I would have to be convinced of the value," says Havens. "A very convincing value would be an enterprise value of $70," she said. That is a theoretical takeover premium of 17% over the market price.