Anybody want to buy a paper?

By Floyd Norris
International Herald Tribune

There is a venerable Wall Street joke featuring an investor who, having accumulated a large position in an illiquid stock, decides it is time to get out. ''Yes, sir,'' replies the broker when he is told to sell. ''To whom?''

The current situation of Knight Ridder, the owner of such newspapers as The Philadelphia Inquirer and The Miami Herald, brings back that joke, albeit painfully.

The investor is a hitherto successful money manager named Bruce Sherman, whose Private Capital Management invests money for wealthy individuals and institutions.

Starting in 2000, he saw value in newspaper stocks, and at last report his clients owned $4.2 billion worth of shares in nine newspaper companies. That is about one-tenth of the total stock issued by those companies and 15 percent of the $30 billion Sherman manages.

He is the largest owner of seven of those companies, with 15 percent of The New York Times Co., publisher of this newspaper; 26 percent of Belo, publisher of The Dallas Morning News and The Providence Journal, and 38 percent of McClatchy, whose papers include The Sacramento Bee and The Minneapolis Star-Tribune.

Founding families control those companies through super-voting stock.

But Knight Ridder, where his stake is 19 percent, has no such stock. After Sherman warned he might support a bid to replace directors, Knight Ridder's board agreed to put the company up for sale.

Sherman's problem is one known by many an investor who looks for cheap stocks: Where he sees value, others see problems. The consensus Wall Street view of newspapers now is that they are a dying breed, destined to wither under relentless competition from the likes of Google.

Profits may be good now, but they will not last, as circulation declines and advertisers seek newer media. An index of newspaper stocks is down 22 percent in 2005.

Money managers are required to file quarterly reports of holdings, but not of purchases and sales. I estimate, based on those filings and assuming trades were made at average prices for each quarter, that in the four years through the end of 2003, Sherman's clients made about $600 million in newspaper stocks.

Unfortunately for them, he kept buying after the shares peaked, and since then they have lost about $1.2 billion, for a net loss of $600 million.

Newspaper stocks are not the only place where he is now bucking conventional wisdom. Last week he reported owning 10 percent of Eastman Kodak, the photo giant struggling to adjust to a digital world. He has accumulated those shares since late 2003, and so far his investors are down about $100 million in that stock.

Over the last decade, his investors did twice as well as those who bought the stocks in the Standard & Poor's 500, but in the last year they have lagged behind the index. It is now managing about four times as much money as it was in 2001, when Legg Mason bought it and began marketing it to customers. A strategy of owning about 150 stocks, many of them relatively small, worked when he was managing a few billion dollars but now leaves him in positions that are hard to get out of if he changes his mind.

Sherman did not agree to be interviewed for this column, and the company did not comment on my estimates. But it is clear that he cannot get out of his newspaper investments unless others come to see value where he does.

And that is where the auction process comes into play. Perhaps private equity companies will see an opportunity to buy and break up Knight Ridder. Perhaps other media companies will bid. The quality of news provided to millions of Americans may depend on who buys, and on how they manage, the papers.

Knight Ridder's plight also reflects the fact that Wall Street is not always nice to those who do what the Street demands. Analysts called for aggressive cost cuts and increased share repurchases, and Knight Ridder complied, in some cases angering employees and creating public controversies over whether news coverage would suffer. Investors showed their lack of gratitude by sending the stock to a three-year low last month.

Anyone want to buy a newspaper? Sherman certainly hopes so.

[November 18, 2005]