Why Would Aerial Capital Double Up On Gannett Stock?

Philip Stone April 15, 2009 Follow on Twitter

What is it the financial experts know that the rest of us don’t as they make their multi-million dollar investments in the newspaper industry, this time with the news that Aerial Capital of Chicago now owns 28.8 million Gannett shares, giving it about a 12.5% ownership compared to a 4.9% ownership before?

That makes Aerial the second largest Gannett shareholder and it should be noted it is the largest institutional shareholder in McClatchy holding 15.2 million shares or 26.4% of the company.

But why would Aerial add 17.7 million shares to its Gannett holdings when the market is so sour these days on newspapers? Gannett, reports Q1 earnings on Thursday, and they are expected to be very dismal with USAToday figures in particular making for very stressful reading – there may be good reason why the publisher resigned to spend more time with his family.  

It could well be that Aerial believes Gannett, the largest US newspaper company, is solidly run and most of its newspapers still turn in a tidy profit, not as great as before, perhaps, but still good. It also has TV properties to buffer newspaper weakness although it’s true TV is not exactly having a great time of it these days.

It’s also doing the necessaries on the cost side like shutting down newspapers that don’t earn their way, making staff take unpaid furloughs, and working on a bond swap to push debt due beyond the current 2012. The bottom line, therefore, could well be that while the market seems to be pricing Gannett as a future bankruptcy candidate, Aerial believes there are enough positives to think differently.

Then again it could have something to do with averaging gains and losses. Bloggers are saying that Aerial had seen around a $100 million loss on its Gannett investments over the past six months – the shares have fallen around 90% in the past two years --  so why not pick up a whole slew of shares at a ridiculously low price to average out the numbers?

Gannett’s shares were at around $2.69 when Aerial announced it had already bought big.  And the immediate reaction on Wall Street was basically “If it’s good enough for Aerial then it’s good enough for us” and the shares rose just shy of 40% on the day. The next trading day they rose another 8% so the full two days run saw the shares up an overall 51%. Tuesday they fell on profit taking but still ended the day at $3.27, so that’s an overall  21.5% up from when the announcement was made, and don’t forget the market overall has had two down days this week.

Can you believe that a month ago Gannett shares actually sank to a closing low of $1.95. Its $3.27 close on Tuesday gives the company a market cap of only $747 million.  Who would ever have believed?

Aerial founder John Rogers has always been a big fan of newspaper shares, Besides McClatchy and Gannett, he was big into hometown Tribune,  and his comments  over the past 18 months or so have been to the effect that newspaper shares couldn’t go much lower and the bottom was nearly there – and of course with that belief he has seen his McClatchy shares drop to 54 cents each.

In a Chicago Tribune interview in July, 2007, he said, “Our firm is based on contrarianism. We often find that’s where opportunity is.” His best quote in the interview which surely must have come back to haunt him as he saw his McClatchy and Gannett investments sink through the floor, “When everyone decides an industry can only go down, usually that’s getting close to the bottom.”

Aerial Portfolio Manager John Miller recently told the AP, “What can’t be ignored are the cyclical issues. We believe advertisers will return when the economy strengthens.” The question, of course, is return to where? There’s a growing feeling out there that much of that lost newspaper advertising will remain lost when the economy recovers with the spend going elsewhere, particularly to digital platforms. Indeed Barclays analyst Craig Huber is projecting  that newspaper advertising revenue this year will decline by 22% and that’s on top of an 18% decline in 2008.

All of this, of course brings back memories of another big institutional investor, Bruce Sherman, the recently-retired CEO of Private Capital Management (PCM). At one point he had around $4 billion of his clients’ money invested in the US newspaper business. He had such stakes as being the largest Knight Ridder shareholder with 19% of the company, 15% of the New York Times Company, he was the largest shareholder in Gannett, and he held substantial holdings in McClatchy (37%), Lee Enterprises, Inc (19%). and Belo (22.3%) as well as holdings in Journal Register Co, Tribune, and Media General.

If there is a good thing to say about Sherman it is that he really did believe in newspapers. He saw they were cash cows. What he didn’t see ahead of time was the advertising downturn and when he did see it he didn’t recognize just how long a cycle it would be. At the end of the day he got rid of all his newspaper holdings at substantial losses, and it was a big black mark on his money-making reputation from which he never really recovered. 

Sherman, 61, will go down in history as the man who forced the Knight Ridder sale – not exactly making him eligible for a newspaper industry lifetime achievement award (but one can’t help but wonder if at the end of the day given hindsight to what has happened since whether Tony Ridder is thanking his lucky stars he got out when he did!)

In normal times one would have to think that Aerial can’t go wrong with investing in Gannett at the price it did. The problem, of course, is that these are not normal times for the newspaper industry and no one can really predict when normal times will return.