“Private Capital Management (PCM) Has $4 Billion Invested in US Newspapers. What Do They Know That We Don’t”? – FTM Sept, 2005; PCM Tells Knight-Ridder To Put Itself Up For Sale

Private Capital Management (PCM) has been taking advantage of 52-week lows for many US newspaper groups over the past few years to buy up shares, unlike most others on Wall Street who believed newspaper shares were on a one-way journey down (and were mostly right). PCM began investing in Knight-Ridder in the year 2000.

ftm background

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That buying spree has made PCM the largest shareholder in Knight-Ridder with a 19% holding, it owns 15% of the New York Times Company (only the Sulzberger family has more), it is the largest share holder in Gannett (the largest US newspaper publisher) and it has substantial holdings in Tribune, Media General, McClatchy, Journal Register Co., Lee Enterprises, Inc. and Belo.

In all it has about $4 billion of its $32 billion invested in the US newspaper business. It is a fairly exclusive organization, only handling portfolios of $2.5 million or more, and has an excellent reputation based on its performance. It is known for its long-term strategy and patience and seldom gets involved in spats with companies it invests in.

But that patience has apparently finally worn thin with the newspaper industry. It has told the Knight-Ridder Board of Directors in a letter that the company should be auctioned off.

And Wall Street believes some transaction will actually occur. K-R shares rose as much as 15% within two days of the PCM letter. And Paul Ginocchio, Deutsche Bank Securities’ respected media analyst, who just the day before the letter was announced downgraded K-R from “hold” to “sell” has reversed himself and now recommends “hold” believing there will be some sort of sale. He noted that PCM, and two other companies friendly to PCM control about 36% of K-R shares and in all eight shareholders own 52% of the shares.

There have been reports on the Internet by former Knight-Ridder executives that the company believes it is probably worth 20% more broken up than as a whole. But the problem for PCM is who can buy the company? One can cherry pick the good parts such as the Internet investments but what to do with the newspapers? An investor from outside the newspaper business would need a strong stomach to take on newspapers now, and if such an investment came from within the industry what company would be able to get that buy past the Justice Department competition authorities? More likely there would be a multitude of buyers for specific properties.

Even so, the rumor mill is already suggesting Gannett and Tribune as the most likely buyers. K-R has a market capitalization (after the PCM letter became public) of some $4 billion.

The fact PCM has thrown down the gauntlet is a recognition that it does not believe the newspaper business is going to get much better any time soon. It comes hard on the heels of a damning report by Goldman Sachs last week that warned, “2005 is shaping up as the (newspaper) industry’s worst year from a revenue growth perspective since the recession impacted 2001-2002 period, with no signs of improvement in the fourth quarter.”

What must really irk PCM is that it addressed the K-R board in mid July with its concerns about the languishing share price and the board reacted with apparent gusto to try and get the share price up. It announced 100 journalist firings at two Philadelphia newspapers plus 45 more in San Jose to cut costs, it has swapped newspapers with Gannett and got itself out of a particularly costly situation in Detroit, it has been making Internet investments as well as buying eight weeklies in the Silicon Valley region, it bought back five million of its shares and authorized the purchase of another five million, and it has increased its dividend. But for all of that, the shares sank another 14%!

With such a dire advertising environment, let alone big price increases for such staples as newsprint, PCM must have reasoned a company sale was the only way in the current environment to get the shares up where they believe they belong. Just PCM’s letter alone caused the shares to jump 9% on the first day. Nothing the board did came even close.

And all of that must be causing consternation at those other newspaper groups where PCM has considerable investments. Could similar letters be on their way in the weeks to come? PCM has certainly let it be known that if newspapers it has invested in are not able to organically correct matters then the investment house favors they put themselves up for sale. Not exactly what cozy corporate executives want to hear.

The market seems to believe some of the other companies could come into play. Most newspaper shares had their best rises in several weeks when the PCM letter became public.

What makes K-R perhaps the easiest target in the PCM portfolio is that is not a “family” business unlike, for instance, the New York Times with the Sulzberger family. Tony Ridder, K-R CEO, is a Ridder (Ridder Newspapers based in San Jose merged with Knight Newspapers based in Miami in 1974) but Ridder owns “only” 1.9% of the shares.

The PCM letter, filed with the Securities and Exchange Commission, told Knight-Ridder it was willing to work with the company in a friendly environment, but if the K-R response was not to its liking then the gloves would come off.

If K-R does not pursue a prompt competitive sale of the company then PCM said it would support efforts to change the board’s composition, it would install new management, it would attempt to acquire a majority of the shares, or any other means to improve shareholder value.

Bruce S. Sherman, PCM’s chief executive, wrote that the board should seek competitive bids “either from financial buyers willing to pay fair value or industry participants that would realize synergies and increased market presence through the acquisition of Knight-Ridder’s highly desirable local newspaper and online advertising assets.”

The letter noted the “limited newspaper growth across the newspaper industry” and that there was “a significant and persistent disparity that exists between the fair value of the company’s assets and the trading range of its shares.” It called the company’s operating margins, “unexceptional”.

PCM basically summed up in the letter what it sees wrong with the newspaper industry in general -- “continuing consolidation among traditional sources of print advertising revenue and the redirection of advertising dollars to other media.” For K-R in particular, apart from its “unexceptional operating margins also the lack of a nationally read newspaper capable of being leveraged in the online market.”

K-R publishes 32 daily newspapers in 29 markets with 3.5 million readers daily and produced $3 billion revenue in 2004.

Even More Reason for a Sale – Circulation At Big K-R Newspapers Take a Dive – November 8, 2005

More ammunition for Knight-Ridder’s top three shareholders, with 36% of the shares between them, that the company should be sold to gain true value (if it is already not too late!) – the biggest K-R properties have reported big circulation declines and a senior editor at the Miami Herald says he does not expect circulation to increase in his lifetime!

The Daily News in Philadelphia was hit with an 11% decline from the same period a year ago, according to the latest ABC measurements. The Philadelphia Inquirer was down 3% for the daily edition and 4.5% for Sunday. At the flagship San Jose Mercury-News, circulation dropped 3.9% for the daily and 5.2% for the Sunday. K-R last month ordered major journalistic firings at all three newspapers to stem losses.

The Miami Herald was down 4.3% for the daily and 3.6% for the Sunday. Taking all 32 dailies as a whole, the average decline for K-R papers was 2% for the dailies and 3.5% for the Sundays, according to K-R, showing that newspapers in smaller cities are doing better than the big metropolitan newspapers.

And a rather startling statement from Tom Fiedler, executive editor at the Miami Herald, as quoted by Editor & Publisher magazine -- he does not expect circulation to increase during his lifetime. “Circulation will continue to drop until there will be a plateauing, then I expect a rapid decline,” he said

He forecast that newspapers will become supplemental reading for a very elite audience and that the new home of the popular press is the Internet.

The official circulation numbers do not include Internet readership, and since newspaper web sites are the most frequently accessed for local news there is a push by publishers that in the future ABC numbers also include Internet traffic.

Three Biggest Shareholders Now Say They Want Knight-Ridder Sold – November 4, 2005

Just days after Private Capital Management, Knight-Ridders’s largest single shareholder, urged the newspaper group’s board to auction off the company, the second and third largest shareholders have also written similar letters to the board urging the same.

Southeastern Asset Management, the company’s second largest shareholder with a 8.9% stake and Harris Associates, the third largest with 8.1% of the shares, have separately written to the board urging the company be sold. Joined with PCM’s 19% stake, it means some 36% of the shareholders want a sale.

Knight-Ridder, meanwhile, has issued t a terse two line statement commenting on the breakup. “ The Knight-Ridder board of directors is always interested in the views of its stockholders. The board takes its fiduciary duties seriously and will respond in due course,” the statement said.

For many years Goldman Sachs has financially advised K-R. The K-R owned San Jose Mercury, published in K-R’s corporate home city, says that a source has told it that Goldman Sachs has now been asked for its advice on the various possible strategies ahead.