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Investors hound flagging newspapers

To the list of challenges faced by newspapers -- declining circulation, rising newsprint costs and increased competition from more up-to-the-minute media -- add another: rising pressure from investors to make more money and reverse sliding stock prices.
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To the list of challenges faced by newspapers -- declining circulation, rising newsprint costs and increased competition from more up-to-the-minute media -- add another: rising pressure from investors to make more money and reverse sliding stock prices.

On Tuesday, newspaper giant Knight Ridder Inc.'s largest shareholder demanded that the company either seek a buyer for the entire company or sell it off, paper by paper. The company's holdings include the Philadelphia Inquirer, the Miami Herald, the San Jose Mercury News and 29 other papers.

Knight Ridder is vulnerable to a sell-off because its stock price has steadily declined, and the same holds true for other major media companies that own newspapers. Gannett Co.'s stock is down 21 percent over the past year, The Washington Post Co.'s is down 19 percent and the New York Times Co.'s is down 30 percent -- opening the door to shareholder dissent.

The situation creates more uncertainty at a time when several major chains have already gone through rounds of layoffs and cutbacks and as newsrooms are setting their budgets for next year.

"You've got a combination of things happening, [from] the transformation of the industry to cyclical issues," said William Dean Singleton, chief executive of MediaNews Group, which owns 40 papers and has minimized investor demands by keeping the company private. "The typical stock analyst hasn't quite figured out which is which, and as a result the industry is getting a bad rap on Wall Street right now, but it will bounce back."

Host of ailments
In a letter to Knight Ridder, Bruce S. Sherman, chief executive of Private Capital Management, which owns 19 percent of the firm, catalogued a host of ailments. He said Knight Ridder is losing too much advertising revenue to other media outlets, such as Web sites. He said the company lacks a nationally circulated newspaper that could generate online ad revenue and has "unexceptional operating margins," despite the fact that the company declared a dividend on Tuesday, had a 19 percent profit margin in 2004 and, in September, said it would lay off 15 percent of the Inquirer's newsroom staff to cut costs.

Despite this, Knight Ridder's stock price was down 23 percent compared with this time last year, until news of Sherman's demand caused a spike in the price on Tuesday.

"In the present environment, even considering management's incremental efforts and the company's top tier assets, the market has persistently failed to recognize the fair value of the company as it is currently configured and managed," Sherman wrote. Sherman's company also holds 35 percent of McClatchy Co. and its 29 papers, as well as 13 percent of the Times Co., making it the second-largest shareholder of the New York paper after the controlling Sulzberger family.

Private Capital Management declined to comment yesterday, but the company's action had its desired effect: Wall Street reacted favorably, raising the stock more than 8 percent to close Tuesday at $58 per share. A Knight Ridder spokesman also declined to comment.

Sherman's gambit pinpoints specific problems at Knight Ridder, which depends more on revenue from its papers than almost any other major newspaper chain.

In 2004, 90 percent of Knight Ridder's revenue came from its newspapers, which means the company is more susceptible to the advertising market, which has been relatively flat this year and in slow recovery since cratering in 2001.

Other newspaper giants are more diverse and can counter ad slumps with revenue from other businesses. For instance, only 37 percent of E.W. Scripps Co.'s revenue comes from its newspapers, which include the Rocky Mountain News. At The Washington Post Co., the number is 28 percent, with the majority of company cash coming from the Kaplan Inc. education division, Cable One Inc. cable company -- which has a steady stream of subscriber revenue -- and six television stations.

No 'quick fix'
But some industry analysts are pessimistic about the companies' prospects.

"I do not believe there is a quick fix for any of the big daily newspaper publishers," given the slumping advertising market, said Larry Grimes, president of W.B. Grimes & Co., a Gaithersburg investment banking firm that focuses on the media industry.

The newspaper slide comes during the exodus of advertisers from more traditional print media to the Internet. Last month, popular search engine Google reported $1.6 billion in third-quarter revenue -- a 700 percent year-over-year increase -- thanks to a boom in online advertising.

Newspaper executives and Wall Street analysts generally were skeptical of a Knight Ridder sale.

"Just because one guy has rattled the sword doesn't mean it's going to happen," Singleton said. "If you don't like the sector, sell the stock."

In a note, Goldman Sachs wrote that "it is not clear to us that there are a large number of potential bidders" and concluded: "We don't view this development as the first step in a process of significant industry consolidation."

Prudential Equity Group wrote that it sees "few, if any, potential buyers."

But Deutsche Bank analysts were bullish on the sale, predicting Knight Ridder's other shareholders would endorse the plan. It suggested Gannett and Tribune as likely suitors and good fits. A Gannett spokeswoman said the company would evaluate Knight Ridder if it came up for sale as a matter of corporate policy.

And analyst Grimes said: "There are media companies and major investor groups who would step up to the plate, if Knight Ridder were willing to deal."

Some within the industry think newspapers are better suited to private rather than public ownership. Private companies attempt to minimize earnings, which are taxable, and maximize cash flow, which can be used to pay down debts. Public companies, however, are pressured to maximize earnings to appease shareholders.

If any single investor is in a position to force change in the newspaper business, it may be Private Capital. The Naples, Fla.-based firm, a subsidiary of Baltimore's Legg Mason Inc., manages more than $8 billion for wealthy investors and institutions. However, Sherman's firm is not known for being an activist investor. According to SEC filings, it has never taken such an overtly hostile stance with any of its portfolio companies.

Staff writers Terence O'Hara and Annys Shin contributed to this report.