Please ensure Javascript is enabled for purposes of website accessibility

Jousting at Knight Ridder

By Tom Taulli – Updated Nov 16, 2016 at 1:17PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Knight Ridder's largest shareholder has lost its patience and wants immediate action to enhance shareholder value.

Whenever a company's board gets a letter from its largest shareholder, it's usually bad news. That was certainly the case this week at Knight Ridder (NYSE:KRI), which received a note from Private Capital Management (PCM), a hedge fund that has a 19% stake in the publishing company and has been an investor since April 2000. The message contained within? Put yourself up for sale.

If asked to identify the key problems at Knight-Ridder and its peers, I'd say (1) the increasing presence of online news media sources, which operate at much lower capital thresholds than newspapers do, and, of course, (2) the historically capital-intensive nature of the newspaper business. In the presence of cheap or even free news, brick-and-mortar newspapers are having a hard time commanding prices and managing costs to effectively compete. The PCM letter agrees that the newspaper business has been mostly awful.

What to do? Well, PCM says the best alternative is to "aggressively pursue the competitive sale of the company."

Knight Ridder is the second-largest newspaper company in the U.S., with a total daily circulation of 3.36 million. Some of its publications include the San Jose Mercury News, The Miami Herald, and The Philadelphia Inquirer.

The lag in the newspaper industry has caught the interest of value players like PCM, a subsidiary of asset-management company Legg Mason (NYSE:LM). PCM has taken positions in a variety of newspaper stocks, including Gannett (NYSE:GCI), McClatchy (NYSE:MNI), and New York Times (NYSE:NYT).

The PCM letter also says that Knight Ridder's "fair value significantly exceeds its current share price." And the good news for shareholders is that PCM is determined to realize this value -- even if it means taking actions to "change the composition of the board, install new management, acquire a majority of the company's voting shares, or take other action to maximize shareholder value."

Robbert Van Batenburg, head of research at Louis Capital Markets, thinks the likely buyers for Knight Ridder include Gannett or Tribune (NYSE:TRB). Or private equity firms might participate, given that the deal can be financed with Knight Ridder's strong cash flows.

PCM's action is yet another example of the rise of hedge fund activism. "Hedge funds have huge amounts of capital and a lot of influence with other institutions," said Warren de Wied, corporate partner and co-chair of the mergers-and-acquisitions practice at Fried Frank. "Moreover, they are not just money managers nowadays -- many of them are actively exploring buyout opportunities. That makes them more credible, and more formidable, when they agitate for change. And success begets success. Look at Beverly Enterprises earlier this year, where hedge funds pursued a similar strategy and ultimately succeeded in forcing the company to put itself up for sale."

But as it relates to the investment opportunity itself, I wouldn't necessarily say that this creates a meaningful opportunity for value creation or realization. PCM may well wring some value out of Knight Ridder's shares, but that's not to say the industry itself isn't saddled with huge structural problems. It's much easier, and much smarter, to take a pass on this one.

The Motley Fool has kicked off its ninth annual Foolanthropy campaign! Nominate your favorite charities on our Foolanthropy discussion board through Nov. 6. For guidelines on what makes a charity Foolish, visit www.foolanthropy.com.

Fool contributor Tom Taulli does not own shares mentioned in this article.

None

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Gannett Co., Inc. Stock Quote
Gannett Co., Inc.
GCI
Legg Mason, Inc. Stock Quote
Legg Mason, Inc.
LM
The New York Times Company Stock Quote
The New York Times Company
NYT
$27.97 (-2.58%) $0.74
The McClatchy Company Stock Quote
The McClatchy Company
MNI

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
329%
 
S&P 500 Returns
106%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 09/24/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.