Tough talk for Knight Ridder
PCM's Bruce Sherman knows how to pick winners, but he's run out of patience with the newspaper chain.
By KRIS HUNDLEY
Published November 3, 2005
Bruce S. Sherman, chief executive of Private Capital Management LP in Naples, is known for having a golden touch with investments and brass knuckles when it comes to personal relationships.
And it's a safe bet Sherman made no friends at Knight Ridder Inc. in San Jose, Calif., Tuesday when he issued an ultimatum to the nation's second-biggest newspaper chain: Put yourself up for sale. Or else PCM will consider "aggressive efforts" to change management.
Sherman, schooled on the streets of Queens, can talk that way to the publisher of the Miami Herald, Philadelphia Inquirer and San Jose Mercury News, and 29 other newspapers because his investment firm is the company's largest shareholder, owning about 19 percent of its stock.
But PCM's stake of 12.8-million shares, acquired at an aggregate price of $840-million since 2000, had dropped by $100-million as of early this week, as newspaper stocks languish in an era of declining readership and erosion of ad revenues.
Being on the losing end of a big investment is not a familiar position for Sherman, whose private investment firm has $32-billion in assets and caters to wealthy individuals, institutions and retirement plans. Minimum investment at the tony South Florida money manager is $2.5-million.
A former Arthur Young accountant in New York, Sherman was tapped in 1979 to handle the fortune of Miles Collier, whose family made billions in Florida real estate and advertising in the early 1900s. In 1986 Sherman arranged the sale of the family's Naples Daily News to Scripps-Howard for $170-million, nine times revenues. The same year, Sherman and Collier started PCM.
Sherman's genius for finding undervalued companies and holding on for a long-term reward was profiled in the 1997 book Investment Gurus by Peter Tanous. Since then, Sherman, 57, has sniffed out at least four companies that were later acquired at double-digit profits by Warren Buffett.
In 2001, PCM was acquired by Baltimore's Legg Mason for up to $1.3-billion, but the financial services company promised to stay out of Sherman's way. Smart move: PCM posted nearly a 22 percent annual rate of return for the 10 years ending June 30, making it the second-most profitable money manager in the nation, according to New York research firm Nelson Information.
Though PCM's portfolio of more than 100 stocks is broad-based, with holdings ranging from hospitals to banks to high-tech, in recent years Sherman has bulked up on newspaper chains. About 14 percent of PCM's money is invested in nine newspaper companies. In addition to Knight Ridder, PCM is the largest institutional owner of the New York Times (14.6 percent). It also owns 18.2 percent of Media General, owner of the Tampa Tribune and WFLA-NBC (Ch. 8).
Media General spokesma n Ray Kozakewicz declined to comment on PCM's ultimatum to Knight Ridder or the possibility of his chain receiving a similar letter from Sherman.
A Knight Ridder spokeswoman said the company would not comment on PCM's letter.
Sherman did not return calls; his attorney has said PCM speaks only through public filings such as the letter to Knight Ridder that was filed with the Securities and Exchange Commission.
Sherman's interest in newspapers was contrarian to the market and typical of PCM's investment strategy. Sherman has said he ignores a company's earnings and focuses on the discretionary cash flow a company generates. And he tries to think like an owner-entrepreneur as opposed to a passive investor.
Despite that stance, Sherman hasn't developed a reputation as an activist shareholder like Carl Icahn, who is famous for breaking up companies to maximize profits. One exception: PCM pushed Oracle Corp. to up its bid for PeopleSoft.
But Knight Ridder apparently tried Sherman's patience. He and other investors met with the chain's chairman and chief executive, Tony Ridder, on July 19 to express concerns about the lagging stock price. After that meeting, Knight Ridder raised its dividend, cut staff, repurchased 5-million shares and agreed to buy back 10-million more. It also acquired some assets and disposed of others, including the Tallahassee Democrat.
Not enough, Sherman said in his Nov. 1 letter. With ad dollars migrating to other media, Knight Ridder's operating margins "unexceptional" and the chain's lack of a major newspaper that could be leveraged online, the Florida money manager said it was time to pull the plug.
"In light of these and other factors," Sherman wrote, "we view the best interests of the shareholders as being served by the board soliciting competitive bids for the company, either from financial buyers willing to pay fair value or industry participants."
If ignored, Sherman said he would work with other shareholders to bring in new managers and directors, acquire a majority of the company's shares or "take other action to maximize shareholder value."
Investors responded positively to Sherman's move, driving Knight Ridder's stock up $1.08 on Wednesday, to close at $59.08. Meanwhile, analysts were not sure who might want to buy the chain.
"While PCM's 19 percent ownership stake, a relatively concentrated shareholder base, little insider ownership and a relatively small market cap could make a forced sale of KRI possible, it is not clear to us that there are a large number of potential bidders," wrote Goldman Sachs analyst Peter Appert. "We don't view this development as the first step in a process of significant industry consolidation."
Merrill Lynch analyst Lauren Rich Fine wrote, "We have some concern that strategic and financial buyers will be reluctant to move forward for the same reasons the sector has suffered in the public market."
Among potential bidders for some or all of Knight Ridder's properties are Gannett, the nation's largest newspaper chain, and Tribune Co., Fine said.
The pressure on Knight Ridder to be sold to the highest bidder was a disappointment but no surprise to Davis "Buzz" Merritt, who worked for the newspaper company for more than 40 years. His book, Knightfall: Knight Ridder and How the Erosion of Newspaper Journalism Is Putting Democracy at Risk, was published in March.
"If this had happened 15 years ago, I would really have been concerned that some communities would lose some truly excellent papers," said Merritt, former editor of the Wichita Eagle. "But in the company's efforts to avoid this sort of thing, Knight Ridder has so degraded the quality of their papers that I'm frankly not sure it matters who owns them anymore."
Times researcher Angie Drobnic Holan contributed to this report, which also used information from wire stories. Kris Hundley can be reached at email@example.com or 727 892-2996.
[Last modified November 3, 2005, 01:06:17]
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