US newspaper circulation decline tempts funds

Even as the United States' daily newspapers report a continued slide in circulation, a growing number of investors are placing bets that the industry has touched bottom.

In the six months ending March 31, daily circulation fell by an average of 2.5 per cent from the same period a year ago at 700 newspapers surveyed by the Audit Bureau of Circulation. That followed a 2.6 per cent drop in the previous six months.

But stocks in major media companies rose after an activist hedge fund said it had acquired a 5.2 per cent stake in newspaper chain McClatchy Co. of Sacramento, California, and the controlling shareholder in a radio company, Emmis Broadcasting Corp, offered to take his company private.

The Emmis offer, at a 13 per cent premium over the company's prior stock price, "has got some excitement in the broader media sector," said Goldman Sachs analyst Peter Appert.

Appert said investors were hoping that a trend toward industry consolidation would continue and that buyouts by private companies could be on the horizon. Either could reward shareholders, though Appert said he thought wholesale upheaval was unlikely.

McClatchy, which will become the second-largest newspaper firm by circulation when it closes a deal to buy Knight Ridder Inc., rose in share price.

The hedge fund, Highfields Capital Management of Boston, said it acquired its McClatchy shares in late April. The stake was worth about $115 million at Monday's closing price.

One of a new breed of highly active funds, Highfields first invested in Circuit City Stores Inc. and then bid more than $3 billion last year in a hostile attempt to take over the company.

The most recent quarterly filing by Highfields shows it held $47 million in Gannett shares, $142 million in Knight Ridder, and $49 million in New York Times Co.

The firm has more than $7 billion under management, including big stakes in Wendy's International Inc. and DirecTV Group.

Knight Ridder's sale was prompted by the public criticism of its three largest shareholders, though it brought only a modest price.

Unlike Knight Ridder and Tribune, McClatchy and The New York Times are both controlled by families who have a special class of stock, limiting the power of shareholders who agitate.

The latest circulation figures released showed declines at 15 of the 20 largest US papers, with none of the gainers improving by more than one per cent.

The steepest drop-off among the big papers was at the San Francisco Chronicle, where weekday circulation declined by more than 15 per cent from a year earlier. The Boston Globe, Atlanta Journal-Constitution, Los Angeles Times and The Philadelphia Inquirer all lost between 5.1 per cent and 8.5 per cent.

The Chronicle, Los Angeles Times and other papers that posted declines said they had deliberately cut back on less profitable circulation, such as papers sold in bulk to hotels and other third parties, which is less desirable to advertisers.

But industry experts said such arguments weren't very convincing at papers that said they were cutting deliberately year after year.

"You can only cry wolf so many times," said Vice-President Colby Atwood of Borell Associates Inc. which advises newspapers on online strategy. "Part of the decline is a genuine decline.''

Newspaper executives and an industry trade group also pointed to increased traffic to newspaper websites. Including Internet visitors, overall readership is up, they said, as is spending on advertising that includes news pages on the Internet.

In 2005, total ad revenue rose 2.5 per cent, according to the Newspaper Association of America, mainly because Internet ads are increasing faster than print ads are falling.

"Newspapers, and particularly metropolitan papers, are losing circulation,'' said analyst John Morton of Morton Research.

"They're losing it to a variety of things, partly, at least, to the Net. Fortunately, lots of them are picking it back up on the Net.''