Three Years Ago Bruce Sherman Controlled More Than 100 Million US Newspaper Shares Worth In Excess of $4 billion; Today He Has None

Philip Stone February 21, 2008

Bruce Sherman, the man running Private Capital Management (PCM) really believed in the newspaper industry. He was the largest owner of US newspaper shares --- at one time his holdings in the New York Times Company was second only to the Ochs-Sulzberger families -- and his 100m shares spread across most newspaper publicly traded companies were worth in excess of $4 billion.

He was the man who forced Knight-Ridder to sell itself but in that he didn’t do himself many favors because he then got a huge stake in McClatchy, and those shares that had been in $50s then are now below $10 today.

When FTM first wrote about Sherman and PCM back in September, 2005, when the newspaper industry wasn’t really doing that well to attract investors, we asked, ““Private Capital Management (PCM) Has $4 Billion Invested in US Newspapers. What Do They Know That We Don’t”?

Well, finally we have the answer – they didn’t know anything that the rest of us didn’t already know, too. And we can say that now because Sherman and PCM are now out of the newspaper game.  Zero holdings.

There’s no telling how much PCM has lost on its newspaper investments, but the bulk of its investments were made when newspaper share prices were hitting then yearly lows and no one really expected the damage that has been done since. In the past three years, for instance, the New York Times Company, one of the better performers, has lost fully 50% of its share price; McClatchy, one of the worst performers, has lost, dare we say it, 86%. With those kinds of numbers the PCM losses surely must have been considerable (but remember fund managers can make good use of tax losses).

Back in 2005 about $4 billion of PCM’s $32 billion investments were in the US newspaper business. PCM is a fairly exclusive organization, only handling portfolios of $2.5 million or more, and it has an excellent reputation based on its performance,  its long-term strategy and patience, and it seldom got involved in spats with companies it invests in, although go tell all that to Tony Ridder!

During its buying spree PCM became the largest shareholder in Knight-Ridder with a 19% holding, it owned 15% of the New York Times Company, it was the largest shareholder in Gannett, the largest US newspaper publisher, and it 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

But according to PCM’s most recent Securities and Exchange Statement, it has divested itself of all newspaper company shares. It had been on that slow course ever since it forced the Knight-Ridder sale in 2006, selling a million shares of one company here, a million shares of another there, but it had still maintained overall considerable  holdings.

Just two years ago, having forced Knight-Ridder into play, PCM wrote to its investors how it saw the newspaper business.

“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,” said Sherman, and Gregg J. Powers, PCM 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, cam and will coexist profitably and symbiotically.”

Nothing to really argue about in there. It was true then and it is true today.  But unfortunately for PCM its financial peers didn’t see it that way. To them it was simply that newspaper circulation is lower, and advertising is off, and margins are less and there are better places to grow one’s money. And so whether Sherman still believes what he wrote two years ago or not this seems a case where his actions speak louder than his words.

Although he may not have intended it, Bruce Sherman may just go down in history as one of the great shakers of the US newspaper business. He forced the Knight Ridder sale, McClatchy made the big buy for what then seemed a cheap price but now its shares languish under $10 and its debt rating has yet again been thrown deeper into junk territory, Scripps and Belo have separated their newspaper business from the rest of their companies so print doesn’t drag everything else down, Tribune went private -- how much of this happened because of the atmosphere created by PCM forcing Knight Ridder to sell itself?

Newspaper historians, we think, will not be overly kind to Mr. Sherman for forcing what eventually became the destruction of Knight Ridder, a proud publisher of 32 daily newspapers in 29 markets with 3.5 million readers daily, producing some $3 billion in annual revenue.