Circulation Falls, but Investors Read Ahead

Even as the country’s daily newspapers reported a continued slide in circulation Monday, more investors placed bets that the industry had touched bottom.

In the six months ended March 31, daily circulation fell an average of 2.5% from a year earlier at 700 newspapers surveyed by the Audit Bureau of Circulations. That followed a 2.6% drop in the previous six months.

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

The Emmis bid, valued at a 14% premium to the previous stock price, “has got some excitement in the broader media sector,� said Goldman, Sachs & Co. analyst Peter Appert.

Appert said investors were hoping that the industry would continue to consolidate and that buyouts by private companies could be on the horizon. Either could reward shareholders, although Appert said widespread upheaval was unlikely.

McClatchy, which will become the second-largest U.S. newspaper publisher by circulation when it closes its acquisition of Knight Ridder Inc., rose $1.44 to $47.09.

The shares of top newspaper company Gannett Co., which also owns 21 television stations, rose $1.60 to $56.86, and the stock of Tribune Co. jumped $1.82, or 6.5%, to $29.84. Tribune’s newspaper holdings include the Los Angeles Times and Chicago Tribune and it controls 26 television stations.

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., 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 Inc.

Highfields didn’t respond to a request for comment. McClatchy CEO Gary B. Pruitt said he had been impressed by the fund’s managers.

“We thought they were smart and had a long-term perspective, and those are the kind of shareholders we want,� Pruitt said.

Knight Ridder’s sale was prompted by public criticism from its three largest shareholders, though it brought only a modest price. Unlike Knight Ridder and Tribune, McClatchy and New York Times are controlled by families who have a special class of stock, limiting the power of agitating shareholders.

The circulation figures released Monday showed declines at 15 of the 20 largest U.S. papers, with none of the gainers improving by more than 1%.

The steepest drop among the big papers occurred at the San Francisco Chronicle, where weekday circulation declined more than 15%. The Boston Globe, Atlanta Journal-Constitution, Los Angeles Times and Philadelphia Inquirer all lost between 5.1% and 8.5%.

The Chronicle, L.A. Times and other papers that posted declines said they had deliberately cut back less-profitable circulation, including bulk sales to third parties such as hotels, a category with less value to advertisers.

But industry experts said such arguments weren’t very convincing for papers that have said they had deliberately trimmed readership year after year.

“You can only cry wolf so many times,� said Vice President Colby Atwood of Borell Associates Inc., which advises newspapers on their Internet strategy. “Part of the decline is a genuine decline.�

Newspaper executives and an industry group also pointed to increased traffic at newspaper websites. If online visitors are included, 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%, according to the Newspaper Assn. of America, mainly because Net advertising is increasing faster than print is contracting.

“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.�

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Mostly down

*--* Year- Average over- weekday year circulation* change USA Today 2,272,815 +0.1% Wall Street Journal 2,049,786 -1.0 N.Y. Times 1,142,464 +0.5 L.A. Times 851,832 -5.4 Washington Post 724,242 -3.7 N.Y. Daily News 708,477 -3.7 N.Y. Post 673,379 -0.7 Chicago Tribune 579,079 +0.9 Houston Chronicle 513,387 -3.6 Arizona Republic 438,722 -2.1

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*For the six-month period that ended March 31.

Source: Audit Bureau of Circulations