As Florida money manager Bruce S. Sherman presses his campaign for a sale of Knight Ridder Inc., he and other principals of his firm could collect a $300 million bonanza this summer -- depending on how things shake out.
Mr. Sherman, chief executive of Legg Mason Inc.'s Private Capital Management LP, shook up the newspaper industry three weeks ago with a letter to Knight Ridder's board, urging it to "aggressively pursue the competitive sale of the company." Bowing to pressure from PCM, the media company's largest shareholder, Knight Ridder, based in San Jose, Calif., last week agreed to put itself up for sale.
Legg Mason, the Baltimore financial-services firm that acquired PCM in 2001, had agreed to make the $300 million payment to Mr. Sherman and the other principals if PCM reaches certain growth targets by next Aug. 1. Under the acquisition agreement, Legg paid $682 million in cash for PCM and agreed to two additional contingency payments on the third and fifth anniversaries of the deal. The first of those payments, for $400 million, has been paid.
A sale of the newspaper-publishing company at the right price could help PCM meet certain financial-performance targets.
Asked whether the prospects for the $300 million payment played a role in the decision to seek Knight Ridder's sale, a PCM spokesman said the Naples, Fla., firm had no comment.
The flagging fortunes of PCM's big bets on newspapers certainly haven't helped the firm's performance. Year to date, PCM's investments have lost money -- something rare in its 20-year history -- and its once-hot asset growth is slowing. Mr. Sherman is highly regarded among money managers, and PCM has recorded losses in only two previous years since 1986.
Over the last five years, PCM has bet heavily on newspaper stocks, acquiring stakes valued at roughly $4.3 billion. PCM has about $30 billion under management invested in stocks.
These holdings include Knight Ridder, the nation's second-largest newspaper publisher by circulation behind Gannett Co. PCM owns 19% of Knight Ridder; the shares have a current market value of about $790 million.
After the letter from Mr. Sherman became public, Knight Ridder's shares shot up on the prospects of a takeover. Since then, they have drifted lower on skepticism that there are many potential buyers, but the shares are still up over their levels before Nov. 1. In 4 p.m. New York Stock Exchange composite trading yesterday, Knight Ridder shares fell 14 cents to $61.40 each.
The timing of Mr. Sherman's overture puzzled many observers in the newspaper industry. "Why, at this moment, are they picking on Knight Ridder?" asks John Cribb, principal broker at the Bozeman, Mont., firm of Cribb & Associates LLC, one of the nation's oldest newspaper brokerages.
Mr. Sherman's firm had been swiftly gathering Knight Ridder shares. From Dec. 31, 2003, to Sept. 30, according to filings with the Securities and Exchange Commission, PCM added nearly six million shares of Knight Ridder, raising its holdings to 12.9 million shares from seven million shares.
But as his stake in Knight Ridder climbed, the company's stock price fell. It reached its record high of $80 a share in 2004.
Earlier this year, PCM's investors received disappointing news. "Your account sustained a modest loss," reported the PCM newsletter for first quarter of 2005. By the third quarter of this year, the news wasn't much better. Mr. Sherman told investors their accounts performed in line with major stock-market indexes. But the portfolio's "return during the third quarter underperformed the market..." As of Sept. 30, PCM's investments were down 0.6% so far this year.
When Legg Mason acquired PCM in 2001, it said PCM was prized as a fast-growing, highly profitable business. Since 1986, Legg Mason said at the time, PCM had achieved an average 24% compound annual rate of return. In a presentation to analysts after the deal was announced, Legg Mason noted that in 1996 PCM had $1.3 billion in assets under management and total revenue of $16.7 million.
By 2000, PCM had $6.6 billion under management and revenue of $75 million. Nearly all of that was profit. For the year ended June 30, 2001, according to unaudited financial statements filed with the securities regulator, PCM and its affiliates reported revenue of $76.1 million. Net income during the same period was $74.8 million.
Legg Mason agreed to the two contingent payments based on a complex formula tied to PCM's earnings as of the anniversaries of the deal. The maximum amount of two payments combined was capped at $700 million -- $400 million after three years and $300 million after five years.
The aggregate purchase price was capped at $1.38 billion.
In a June filing with the SEC, Legg Mason said, "if PCM's revenues remain at current levels or increase, we will be required to make the fifth anniversary payment of $300 million."
A Legg Mason spokeswoman said that statement is still accurate.
Write to Joseph T. Hallinan at joe.hallinan@wsj.com
