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Is the romance gone from newspapers?
Institutional shareholders are looking for some return on their investment in newspaper companies.
December 12, 2005: 10:35 AM EST
By Greg Lindsay, Business 2.0

NEW YORK (Business 2.0) - What is it about the media business that reduces otherwise gimlet-eyed journalists to hopelessly romantic idealists? Reporters who don't think twice when Hewlett-Packard tosses another 15,000 employees over the side began writing letters to Poynter's Romenesko blog debating the very idea of shareholder value once the Knight Ridder newspaper chain was forced onto the block.

Knight Ridder is the second-largest newspaper chain in the country, behind Gannett, although perhaps not for long. The company's single largest investor, Private Capital Management, sent an ultimatum to the board last month demanding an imminent sale or breakup so it could realize some sort of premium on its 20 percent holding considering the stagnant stock price.

The announcement that CEO Tony Ridder had dutifully hired Goldman Sachs to begin looking around prompted those newly romantic journos to suggest nominating a slate of their retired colleagues to the board or inspiring communities to buy their local papers, as if they were Green Bay and Knight Ridder were the Packers.

They have nothing but disdain for PCM, the institutional shareholders who care about nothing other than the share price, and the Wall Street analysts who approve of radical cost cutting to justify the deal. (Morgan Stanley's Douglas Arthur, whose "scorched earth" recommendation would pare $350 million in costs, was denounced in the pages of Knight Ridder's Philadelphia Daily News, which under Arthur's plan would be the first thing to go.)

Of course, if these same journalists were writing about any industry besides newspapers, they might be less soft-hearted and more hard-headed. They'd point out that newspapers are losing their main reason for being in business -- their readers. They'd point out how Web sites are draining away lucrative classified advertising. They might even applaud PCM for shaking up management.

They don't, of course, because they're hopeless romantics about the business they're in. Investors like PCM are realists and figure that newspapers are no longer growth properties. They're not even value properties. They're cash cows to be milked -- a trick that private equity funds do best. What's fascinating in Knight Ridder's case is how its leaders -- who have been less willing to cut costs than their peers at Gannett or Tribune Co. -- have been upstaged by presumably savvier investors who want out of the stock right now.

PCM's ultimatum looks to be inspired by a reported $300 million payout the firm will receive from its parent company, mutual fund manager Legg Mason, if the fund matches certain growth targets this year. PCM has a stake of about 10 percent in nine different, mostly depressed newspaper publishers. Its only hope of hitting the target is making a big score on Knight Ridder -- a move that would lift that and other newspaper holdings at the same time.

A trio of private equity funds -- the Blackstone Group, Kohlberg Kravis Roberts, and Providence Equity Partners -- is currently considering a joint run at Knight Ridder. KKR has an inside track on print media's woes: It owns 60 percent of magazine publisher Primedia, whose stock has dropped by more than half this year, though it's extracted considerable value from the company through asset sales to fund the redemption of preferred shares.

Take Primedia's fate as a sign of things to come for newspapers. If PCM sells to the KKR team, it's a sure admission that the newspapers' current owners are out of ideas on how to generate growth, or even maintain their current cash flow.

Journalists might squawk at the idea, but sell-offs, breakups, and slash-and-burn tactics increasingly appear to be the only way to extract value from lumbering media concerns. Advertisers are hesitant to increase spending anywhere but on the Web. Expect the tension between mainstream journalists and their owners to only ratchet higher now that the latter believe some creative destruction is necessary.

"Private equity guys are in the business to make money," says Mark Edmiston, managing director of investment bank AdMedia Partners. "They're not issue-driven. And in the course of making money -- presuming it's legal -- any way works. They're asking themselves, 'Are we getting any profit out of this? No? Then let's break it up and do more with this.'"

It's not romantic; it's just business. And though journalists may complain, that's the future of newspapers.  Top of page

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