Just When It Looks Like Big Newspaper Investors Are Trying Anything To Get Out Of the Segment Without Losing Their Shirts, Up Comes Highfields Capital Management Buying A 5.2% Stake In McClatchy

The McClatchy stake is worth around $115 million. It also holds a $49 million stake in the New York Times Company and $47 million of Gannett. But all of this is basically petty cash to a fund that has around $7 billion under management – it really goes for the big game such as its $3 billion hostile takeover bid last year for the Circuit City electronics stores.

But the real news is that here is a hedge fund buying into newspapers while all the news of late is about major investors trying to get public newspaper companies to do all they can to lift their shares off what are near multi-year lows.

So if the smart folks at HCM have made such an investment does that mean the bottom has been reached for newspaper shares and now they’re a pretty good bargain? The answer to that must come from those high flyers on Wall Street rather than some lowly paid article writer, but a curious newspaper industry happening occurred this week that is worth noting.

The Audit Bureau of Circulation (ABC) reported that for the past six months ending March 31, US newspaper circulation continued its downward spiral, falling an average 2.5% from the year before. That was on top of the 2.6% drop from the six months before. Of the 20 top circulation newspapers, 15 saw circulation drops – the worst being the San Francisco Chronicle with 15% -- and no newspaper gained more than 1%. Sunday circulation dropped 3.1%.

So with the continuation of all that bad news newspaper stocks obviously continued their downward tumble, right? Wrong. They rallied! Tribune, for instance, actually went up 6.5%, the New York Times Company increased by 4.4%, and Gannett and McClatchy rose 3%. All have fallen back a bit since, but they’re still higher than when the circulation figures were announced.

And that buying occurred even though many Wall Street analysts that follow the newspaper segment wrote basically negative reports on the numbers, saying there was still no improvement in sight.

As a smart investor said years ago, “If we could all figure out why the market goes up when we all think it should go down, and why it goes down when we think it should go up, then we would all be multi-millionaires!”

There are a couple of possible reasons why suddenly the buyers jumped in. For many newspaper companies their shares were near multi-year lows. And while the prevailing financial rule is that you don’t chase a stock down but rather catch it on the way up, there may be a new view that newspapers are a bit overdone these days.

ftm background

It’s Time The Media Quit Wasting All That Money On Share Buybacks, And Put That Money into The Internet Instead
Media companies continue to throw millions of dollars, pounds, euros, kroner – you name it -- into a stock market bottomless pit in a bid to boost their share values. Financial analysts say buybacks are “A gift to shareholders that keep on giving” but the media’s experience is that it is just throwing good money after bad. So its time to call “Time” and invest that shareholder value where it will do the most good – the Internet.

When Knight-Ridder’s Largest Shareholder Told the Company To Sell Itself, The Shares of Most Newspapers Companies Jumped In the Hope This Was the Start of Good Times Ahead. Actually It Was The Start of That Shareholder Dumping Some $2 Billion Worth of Shares Involving Nine Newspaper Groups
Last November, the largest shareholder in US newspaper shares shocked Wall Street by demanding that Knight-Ridder (K-R) put itself up for sale to enhance shareholder value. The next two largest shareholders joined in and the die was cast. Shares in K-R and most other publicly quoted companies rose strongly and immediately on the hope this was just the start of improving shareholder value for that market sector.

Knight-Ridder Hired Goldman Sachs to Garner Shareholder Value Via a Sale, So At Least That Wall Street Firm Has a Positive Outlook for the Newspaper Industry? Well, Actually, No, It Believes Revenue Growth Looks “Challenging” -- What a Great Sales Pitch!
Everyone was expecting US newspaper circulation numbers for the past six months to be bad. But very few expected them to be THAT bad. At the San Francisco Chronicle, for instance, nearly one in five subscribers quit. Overall, the country lost 1.2 million subscribers, 2.6% of its base.

Now That Knight-Ridder Is Officially For Sale, Two Questions Emerge: Who Would be Foolhardy Enough to Buy Newspapers These Days and Which Major Media Group Will Next Feel Shareholder Pressure To Sell Itself?
Knight-Ridder didn’t have much choice. With its three largest shareholders representing some 36% of the shares telling the company to explore ways of selling itself and threatening board changes if it didn’t, it hired Goldman Sachs to scout out the market.

“Private Capital Management (PCM) Has $4 Billion Invested in US Newspapers. What Do They Know That We Don’t”? – ftm September 2005; PCM Tells Knight-Ridder To Put Itself Up For Sale
In what must be considered a very gloomy assessment of the US newspaper business, one of its largest institutional investors has seemingly lost patience with the industry being able to turn itself around, and has now urged Knight-Ridder (K-R), the country’s second largest newspaper chain, to put itself up for sale.

That view could suddenly catch the “short seller” off-guard. The newspaper segment is probably heavily sold short -- sellers selling shares they do not own on the assumption the price will go down even more and they can buy the shares at that lower price and deliver them to cover their original higher sale price and make a profit, It’s probably one reason why newspaper shares have fallen as much as they have, short players counting on them going lower.

But if the shares don’t go down fast enough, or actually rise as they did on Monday, the short sellers need to jump into the market and buy to limit their exposure. It is not an activity for the faint of heart, and it probably explains much of the one-day jump.

And then there is that circulation news – bad as it was there could be a feeling that the news might have been worse and perhaps the situation is stabilizing. And if there is recognition that newspaper web sites are actually doing quite well, and since Wall Street likes to invest in the future, perhaps the total picture is now being taken into account.

Add to that newspapers are becoming more experienced at offering cross platform packages to their advertisers, then it may be that newspaper Internet activities are finally becoming recognized for the power they could produce together.

The Newspaper Association of America (NAA), quoting research from Nielsen/NetRatings says that some 56 million readers visited newspaper web sites in the first quarter, an 8% increase, and representing about 37% of all US online users in Q1. But while advertising is picking up on those web sites by around 25% annually, for many newspaper companies web revenue is only around 5-6% of total revenue, although companies like Tribune are saying they want to double those Internet revenues within three years.

Local newspaper web sites are becoming the predominant place Internet users are going for their local information. According to the NAA, “of the nearly 112 million people who visited news and information Web sites, more than half (58%) of those seeking news and information online turned to an online newspaper Web site.”

But while newspapers are now learning to deal with the Internet they still don’t seem to have come to terms with the “Do Not Call” registries that prevent marketers from calling registered numbers. With older readers passing away, and the younger readers migrating to the Internet, it’s getting more difficult and expensive to bring in new print readers. Not being able to just go through the telephone book as they once depended upon to make the telephone sales pitch has made the marketing life much more difficult and expensive.

“Then cost of acquiring a new subscriber has doubled in the past eight years,” according to John Murray, the NAA’s vice president of circulation.

Even more reason why newspapers are hoping that advertisers and Wall Street alike will now start looking at combined print/Internet numbers instead of print alone when considering the health and power of the newspaper industry.