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.

For that shareholder, Private Capital Management (PCM), long suffering from newspaper shares grossly underperforming the general market, this was the golden opportunity to get some cash in house while the going was

good. So, by pressuring K-R to put itself up for sale, and with the market’s buying spree based on that action, PCM started selling around 4 million plus newspaper shares it owned. It still owns around 100 million newspaper shares and remains the largest US newspaper shareholder.

During Q4, PCM sold 1 million New York Times Company shares, taking those holdings down to “just” 20.7 million. It got rid of 800,000 Gannett shares, leaving it with 15.9 million shares, not waiting for what might happen with K-R, it reduced those holdings by 500,000, down to 12.4 million, it brought its ownership in Belo Company down by 1.4 million shares to 23.3 million and it also sold shares in the Journal Register Company, Lee Enterprises, McClatchy Company, Media General Inc., and Tribune Company.

ftm background

US Newspaper Executives Tell Wall Street This Week Their 2006 Prognosis But the Real Story is That Knight-Ridder Won’t Be Presenting – It’s In the Midst Of Being Forced to Try and Sell Itself -- And That’s the Real Future That Many of Them Don’t Want to Talk About!
When the major US publishing companies give their various reports to the 33rd annual UBS Media Week Conference and to the Credit Suisse First Boston media meeting this week the shadow of who is not there will be overwhelming. Knight-Ridder’s prognosis is already known – its three main shareholders want it sold to gain shareholder value, and many of those other newspaper companies – especially those without family protection on their shareholdings – fear they could soon be in the same boat.

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 Sept, 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.

New York Times Company and Knight-Ridder Announce Further Layoffs Based on Glum Advertising Forecasts Triggering Major Sell-Offs As Major US Newspaper Groups See Their Shares Sink Below 52-Week Lows
It was only last May that the New York Times Company announced 195 layoffs so another internal “Arthur” and “Janet” note this week so soon afterwards announcing another 500 employees are to go – 4% of its workforce -- has rocked the US newspaper establishment. “Arthur” is Arthur Sulzberger Jr, chairman of the New York Times Company and publisher of the New York Times, and “Janet” is Janet Robinson, president and CEO. When they talk of hard times ahead the whole industry shudders.

According to PCM’s latest filing with the US Securities and Exchange Commission, PCM’s newspaper portfolio value dropped from $29.9 billion to $27.9 billion, and newspapers now account for 13.8% of its investment portfolio from the previous 16%.

PCM only accepts clients with $2.5 million or more to invest. Its goal is to double the value of a client’s portfolio every five years but it admits that 2005 “was a difficult year.”

The company had several investment problems. Newspapers represented 16% of its portfolio, making it the largest US investor in the sector, but newspapers were underperforming the general market by some 12%. No matter what newspapers did – share buybacks, increased dividends, stringent cost cutting – newspaper shares languished, because of fears the Internet would destroy them and that advertising and circulation were down with few signs of any improvement ahead.

If that wasn’t bad enough, PCM was nowhere to be found in the one sector that really outperformed the market – oil and gas. And the knockout punch came three times -- hurricanes Katrina, Rita and Wilma tore right through their regional casinos and hospitals portfolio,

So whereas it normally keeps out of the affairs of companies it invests in, PCM was in a corner – it needed shareholder value from those newspaper investments real bad, and thus the letter to Knight-Ridder and all that ensued.

It’s not easy telling your wealthy investors who demand good results and no excuses why the year was difficult, but in PCM’s fourth quarter report, executives defended their newspaper investments and probably gave as good a prediction for the future of newspapers that you will find anywhere.

“From a fundamental standpoint, the newspaper companies in your portfolio are moderately leveraged, produce massive free cash flow and yield operating margins approaching those of the best software or pharmaceutical companies. Although it is true that valuations are at historical lows our thesis is not based on such simple statistical argument,” according to Bruce S. Sherman, chief executive officer, and Gregg J. Powers, President.

They wrote they do not believe that the Yahoos and Googles of this world will become substitutes for the daily newspaper. “While we do not disagree that the paper component of the newspaper delivery mechanism will continue to decline in importance, we believe the bearish case neglects to consider the inherently local nature of the newspaper business.

“Newspaper companies gather and publish a myriad content based on local information. Local political developments, real estate information, dining reviews, recreation activities, classified, new business opportunities, school schedules and sports results are just a few examples of content that inherently must be originated locally. Newspaper companies are implementing strategies to migrate this traditionally print-based content to the Web, in forms that will evolve into a super-set of the print publication.

“Viewed from our perspective, the ability to sustain a long-term paper-based franchise while leveraging the same content into electronic distribution affords the newspaper industry the opportunity not just to survive, but eventually to resume robust growth. We believe it will become increasingly apparent that the Internet, as a distribution conduit, and the local newspaper media company, as a content producer, can and will coexist profitably and symbiotically.”

PCM Dumps More Media Shares - February 19, 2007

When ftm first wrote about Private Capital Management (PCM) in 2005 and its very large stakes in US newspaper companies, we asked aloud what its management knew about the newspaper business that made it so gung-ho to believe it was the growth business that few others recognized? The answer seems to be in: nothing.

PCM has been aggressively dumping its newspapers shares for the past couple of years. In the last quarter of 2006 it reduced its holdings in Gannett by 32% to 7.4 million shares but that still represents some 3% of the company. It owns 9% fewer shares of Belo but still has a 17% stake, its holdings in the New York Times dropped 20% and its McClatchy holdings were down 14%.

The year before PCM sold about 1 million New York Times shares, 800,000 Gannett shares, 1.4 million Belo, shares plus some of its holdings in Journal Register, Lee Enterprises, McClatchy, Media General, and Tribune.

The sales may not necessarily represent a total lack of confidence in media. PCM has a lot of very wealthy clients who could make good use of the tax losses PCM may have with those investments.

PCM’s total holdings in newspapers is still thought to be more than $20 billion, representing more than 10% of the fund’s holdings.

McClatchy Buys Knight-Ridder for $4.5 Billion As Wall Street Yawns - March 14, 2006

In a mixture of $40 cash and the rest in shares, McClatchy has agreed to buy the 32 Knight-Ridder newspapers for the equivalent of $67.25 a share, which has left most Wall Street analysts believing all is still not well in the US newspaper industry since the premium paid was so little.

Compared with the K-R price before it put itself up for sale it is a 26% premium, so in that respect those three top shareholders who wanted the company sold to get shareholder value did okay, but compared with K-R’s recent $65 share price it is a minimal premium that does not auger well for newspaper valuations in general.

McClatchy says it will sell 12 of the 32 newspapers it is buying since they are in larger markets with limited growth such as San Jose, California, and Philadelphia, and those sales will help finance the deal, but it will hold onto the Miami Herald.

What is just as interesting is who didn’t buy K-R. Where was Gannett? Where was Media News? Where were the major private equity companies? Are they waiting in the wings for McClatchy to sell those 12 newspapers? Are those deals already agreed? We’ll have a full appraisal in Thursday’s FTM.