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charles bobrinskoy

Bobrinskoy is vice chairman of Chicago-based Ariel Capital Management. It is the fifth largest investor in the Tribune Company, which owns 23 television stations and 11 newspapers, including the Baltimore Sun, the Los Angeles Times and Newsday. With its stock price dipping, the Tribune Company effectively put itself up for sale in the fall of 2006. This is the edited transcript of an interview conducted on Oct. 30, 2006.

How much influence do you, the fifth largest investor in the Tribune, have on the company?

At Ariel we have a lot of confidence in the board of the Tribune Company, so we have not tried to tell them how to run the company. We don't tell them what to do. We frankly think it's a very strong board, one of the strongest in which we've invested. We have a lot of faith in people like Bill Osborn, who's the lead director of the Tribune, and we have a lot of faith that he will do the things that he needs to do to unlock shareholder value.

Were you here when the Tribune bought Times Mirror newspapers, [an $8.3 billion deal that included the Los Angeles Times, Baltimore Sun Newsday and some others]?

I was not at Ariel. I was an investment banker at the time.

When Tribune bought Times Mirror, was that a good deal?

It was a terrible deal, and the market knew it at the time. Tribune's stock declined dramatically on the day they announced they were buying Times Mirror. They overpaid. They paid about $8.2 billion for Times Mirror. Today the whole company, Times Mirror plus the Tribune, is only worth about $8.2 billion, so they significantly overpaid. Everybody knew it at the time. It wasn't a good deal.

Every company needs to make a decent return on its investments, every company that's publicly owned. ... So that's causing a lot of the pressures that we're talking about today.

“There's a role for probably three national newspapers -- The Wall Street Journal, The New York Times and USA Today. ... We don't think there's any demand for a fourth. ”

The second thing that's happened at the Tribune and at the L.A. Times in particular is that newspapers around the country have figured out that what you have to do today to survive is provide local news coverage. People want to read about what's going on in their own communities, and the Web usually can't provide that. The Web can tell you what's going on in Iraq; the Web can tell you what's going on in Washington, D.C. It can't tell you what's going on in Des Moines if you live in Des Moines.

The L.A. Times unfortunately hasn't figured that out. They've decided that they have to be a national newspaper with international coverage. They've got over 20 foreign bureaus, including bureaus in Istanbul and Cairo. Nobody is reading the L.A. Times wanting to find out what's happening in Istanbul, so it's critical that the L.A. Times figure out what it is, which is a provider of local news about what's going on in Southern California.

That's why we're so optimistic about the industry. If you get it right and if you are focused on covering the local news, there's still no better source for that news than the newspaper.

The L.A. Times is not very well known for its intense coverage of City Hall, local communities and so forth.

And that's the problem. The L.A. Times has had bigger circulation declines than any other major newspaper. It does a very poor job of focusing on Southern California. Instead, again, it's got these 22 foreign bureaus. It's trying to be The New York Times, which everyone -- the writers and editors of the L.A. Times want to have their opinions read by their peers across the country, by politicians in New York and Washington, by the people who give away Pulitzer Prizes.

That's not what readers want. Readers care about the local entertainment industry, which they don't do a very good job of covering in the L.A. Times. They care about things like fashion, which The New York Times does a very good job of covering; the L.A. Times doesn't. They should care about issues like immigration. All of the Mexican-American immigration issues should be front and center in the L.A. Times. They should own that story, and they don't in the way they should.

We own a lot of newspaper stocks in a lot of newspaper companies, and the best get it: Focus on what you do best, and that's provide coverage of local news.

But if you don't invest in the product itself -- in this case, a newspaper and its ability to gather news and have experienced people do it -- eventually no one will buy it.

What we would argue is that The Washington Post does a better job of covering its local market with fewer reporters than the L.A. Times does, maybe 15 to 20 percent fewer. How does it do that? It does it through focus. If you focus on your target market -- again, Washington D.C., politics; in the case of The Washington Post, the Washington Redskins, who they do a great job of covering at The Washington Post -- then you can get by with less reporters than the L.A. Times has, because it's trying to cover the world. It's trying to report on why Bush went to war in Iraq instead of what's going on in Southern California.

What they say is, with the cutbacks, there's been no real investment in the Web site of the L.A. Times or in a plan to change the nature of the coverage and go more local; that really all it is is, we're paying for their mistake, combined with these unusual market conditions, the rise of the Internet, the end of classified ads, etc.

As we all know, anybody who covers the Internet industry at all knows, it doesn't take a lot of actual investment to get a Web page right. It takes focus on what you're covering and what's on that Web page. Getting a good Web page is not something that requires a $500 million investment. It requires focus on what's there, what stories are there, what are you covering. How do you deal with advertisers on those pages? The L.A. Times doesn't do a good job on any of those fronts, whereas The Washington Post, The Wall Street Journal, The New York Times all do an excellent job.

How much does it cost your company, the failure of this Times-Mirror deal?

We were able to take advantage of this deal in some ways by the price dropping so much. The market hated this deal on day one, and so the stock dropped dramatically.

The idea of synergy didn't impress Wall Street at all, this idea of TV and all these newspapers?

The strategy that they came up with, which was the idea that advertisers would want to go to one source in New York, Chicago and L.A. for both newspapers and television was a strategy that just didn't work. GM [General Motors] doesn't need the Tribune Company to buy ad space in L.A. or Chicago; they can do that on their own. What Tribune had always done a wonderful job of understanding was the importance of local, and unfortunately this deal was built on a strategy of national that just hasn't panned out.

Was anyone at the Tribune Company made to walk the plank over this deal?

My answer to that would be that a lot of executives at Tribune have had a significant impact on their net worth because of this deal. ... They're paid in stock options that are now worthless. ...

Did it surprise you that the publishers who were sent out to Los Angeles by the Tribune Company in a sense joined the other side, said, "You're doing this the wrong way," and in one case went public?

We think the management of the Tribune Company and its board understand the need for the L.A. Times to focus. It has been difficult to get the troops on the ground to agree to that strategy. Part of the arrangement with the Chandler family [who owned the L.A. Times] and the ownership of Times Mirror was to take a relatively hands-off strategy toward running the L.A. Times. In hindsight, probably a little bit more hands-on would have been appropriate.

Hands-on by?

The paper, in hindsight, probably could have used a little bit more management out of Chicago.

So does that mean [L.A. Times editor] Dean Baquet's days are numbered?

Editor's Note: In November 2006, Baquet was fired as editor of the paper.]

We hope not. Everybody tells us that he's a very smart guy with a lot of journalistic credibility, ... so we're optimistic that he can be made to see the importance of focusing on local, which is what the Tribune has done so well for its whole history.

A stock analyst said newspapers are a good business but terrible investment.

Good investing is all about investing in good businesses, so we believe that the newspaper business can be, properly run, a very, very good business. There are still huge barriers to entry in most markets. Most markets are now just one-newspaper markets, where there used to be 20 years ago two- or three-newspaper markets. That gives people a monopoly, and that's a very powerful position to be in.

[Berkshire Hathaway chairman and billionaire investor] Warren Buffett disagrees.

Warren -- first of all, the newspaper industry is the industry in which he probably made the most money. His investment in The Washington Post was probably his best investment ever, for all the reasons that I'm talking about -- the very strong cash flows, the high barriers to entry. Very hard for somebody else to start a new newspaper.

He has lately felt that the decline in circulation is going to make this a much tougher business going forward. We at Ariel respectfully disagree. We think that the market already understands all of the challenges that these companies have from a circulation point of view. There's no other business that's more maligned in the press. Everybody talks about how tough the newspaper business is. We think that's already reflected in the stocks, and in fact, the stocks have been oversold. One of the pieces of evidence we use for that position is the fact that we think that private equity firms, who are very cold-blooded about this kind of decision, are coming to look at the newspaper industry as a great business where they can make very good returns because the cash flows are so strong.

Mr. Buffett, with all due respect, says this is an industry where there are too many competitors -- says the same about broadcast television -- and its trend line is to zero.

A couple things. One, Warren would tell you he's not in any way an expert on the Internet, and one of the things he's underestimating is the growth of the interactive and Internet traffic at many of these newspapers. Tribune and McClatchy [Company] both have growth in their Internet properties of 25 to 35 percent. We think that McClatchy will have half of its revenues coming from the Internet within five to six years.

The second thing he's underestimating, we think, is the innovative skills of this industry. This industry started as newspapers. When radio came along the Tribune formed WGN Radio. Then when TV came along they formed WGN TV. When the Internet came along, they were one of the first investors in AOL. They turned a $7 million investment in AOL into over $1 billion. These are people who understand how to take advantage of new media.

A lot of people don't know this: The Internet site that has the most help-wanted ads, most people think it's Monster; it's actually CareerBuilder.com, which is owned by the Tribune, McClatchy and Gannett. So they are doing a great job of getting their product onto the Internet, and we think the market is underestimating that.

Warren Buffett again -- [he says] it's been interesting to watch newspaper owners and investors resist seeing what's going on right in front of them.

Of all the industries that we invest in, there's no industry that's more out of favor right now than the newspaper industry. No doubt about it. That's what we do at Ariel is we try to be contrarian and buy when others are selling. And there's no doubt about it -- people are selling newspapers right now.

Buying low because you think it's going to go back up.

That's right. We know the stocks are trading at the lowest multiples of earnings and cash flow that they have in the last 20 years. Just today the Dow Jones company announced that it had sold six newspapers for 11.5 times operating cash flow. The average newspaper today is trading, as a stock, at about 7.5 times cash flow. So when they went to sell these newspapers, they got real buyers writing real checks for over 11 times, and yet the stocks are trading at 7.5, 8. So we think there are real buyers. Again, private equity firms are going to pay good prices for these companies. The business is not nearly as bad as many people think.

Morgan Stanley criticized the management of The New York Times.

The New York Times is a special case, and because of its ownership structure, The New York Times has paid less attention to returns for its shareholders than really any other newspaper. So it's a special case. I would say The New York Times comes close to ignoring issues like returns for shareholders, and that's what Morgan Stanley is so upset about.

It's making profits.

There's a difference. Making a return for your shareholders.

What's the difference?

You can have a big profit. If those profits are declining every year, those shareholders are not going to get a return on their investment. A very important concept in investing in stocks is not just the level of profits, but the direction of profits, and The New York Times has not had growing profits over the years.

Do you feel these news organizations are still willing to invest in long-term investigative reporting?

This is the argument that the people in the newsrooms have used for why we can't cut anything, because investigative reporting will go out the window. What we're saying is that you could give up the Istanbul office and nobody in L.A. would miss it. I wouldn't miss it. I'm not looking to the L.A. Times on their reporting on Istanbul.

I think we could have a win/win situation, where the L.A. Times could focus on providing news, better news, investigative news on what's happening in L.A. City Hall and be more focused and provide a better, higher-quality news product. And allow CNN and Fox to cover Istanbul. And then we'd all be better off. The shareholders would make a better return, and my news coverage would be better.

Fox is not covering Istanbul, and CNN is cutting back on its international newsgathering. People in the newsrooms say most of that information comes from newspapers. They do 80 percent or more of the gathering every day.

Again, you're entitled to your opinion on this. My opinion, as a user, is I have been reading newspapers and looking for information for all of my years, and I've never had more information about what's going on in the world than I have today.

USA Today is not necessarily going to spend the time on more in-depth stories that require more experienced people to do [them].

Here's the key distinction. We have no problem with long-term reporting and long-term investments. What we have a problem with is investments outside of the area that we think the L.A. Times should be covering. We don't want a long-term study on corruption in Istanbul; we don't mind a six-month study on corruption in the L.A. City Hall. When they do that we find their readers appreciate it, buy the newspaper, gobble up all the information about corruption at City Hall, and that's a win/win situation.

Where the problem is, is that the people who are writing the L.A. Times, they want to be writing about international events. They want to be writing long-term pieces about why Bush went to war in Iraq. And we're saying, and the people at Tribune are saying, there are other people writing those stories. Certainly you would agree with me: There's no lack of coverage on the issue of why Bush went to war in Iraq. Do we really need the L.A. Times devoting the resources it has to that story?

Knight Ridder, which doesn't exist as a chain anymore, was the one group that reported critically on WMD [weapons of mass destruction] and the reasons to go to war in Iraq. It was a fourth voice that doesn't exist anymore, doing national coverage.

If you and I went to the local bookstore, we could build a stack from here to the ceiling with books on why Bush went to war in Iraq. There's no lack of coverage of that issue.

[You say] the demographic for advertisers in newspapers is good?

That's what's so wonderful and misunderstood about this. People say that newspaper circulation has been declining. Newspaper circulation has been declining since 1957, relatively steady, about 1 to 2 percent a year. The beauty is that the remaining readers are of a higher average income, higher average education, higher disposable dollar, spend more time reading that newspaper than [they] do alternative sources of media, and, very importantly, they don't object to the ad in the way they do on an Internet site or on a TV show. Nobody's TiVo-ing, fast-forwarding the advertisements in a newspaper.

Younger people -- are they reading newspapers?

Young people will read newspapers when it's focused on local events. My son doesn't care what the Chicago Tribune says about Iraq. He reads CNN.com and Fox News to find out what's going on in Iraq.

I'm talking about the public-interest role of major national newspapers, the L.A. Times, as of today, included.

And that's obviously what we're contesting. We're saying there's a role for probably three national newspapers -- The Wall Street Journal, The New York Times, and USA Today. Each has its own niche; all three are national newspapers. We don't think there's any demand for a fourth. The L.A. Times is trying to be that fourth.

The larger organizations do stories spread over several states that other newspapers or broadcasters can't cover. You're saying that market is no longer there?

I would have a different view of that. I would say that when CBS came to do a story on Mayor [Richard] Daley and what was going on in Chicago City Hall, they tended to get it wrong, whereas the Chicago Tribune did a very good job of covering what was going on with Mayor Daley.

There are national issues. Immigration is a national issue that CBS, ABC, CNN, Fox are all covering with the national newspapers. We would argue there is no shortage and no undercoverage of these issues.

[Former L.A. Times editor] John Carroll says all these cutbacks are the Chicago corporation milking the profits instead of reinvesting [them] in the product.

One of the things we haven't talked about is the lack of ability of many newspapers to take advantage of technology. Anybody who's written a report in the last 20 years knows how much easier and faster it is to gather basic information about a subject. You should be able to be much more efficient in the newsgathering function today. Newspapers have not been good at taking advantage of those functions. We still have situations with the Chicago Tribune -- the Tribune Company -- having four sets of reporters and cameramen covering the same event. There should be lots of opportunities for synergy. Until very recently, chicagotribune.com and Chicago Tribune had separate editorial staffs writing separate articles. That just made no sense.

You're talking about eliminating jobs.

A leading journalistic source said that since 1970, the number of people employed by newspapers and broadcasting companies in the news profession is up about 40 percent. So the idea that there aren't any newsmen anymore anywhere is an exaggeration.

Quantity doesn't equal quality.

That's true.

There's a lot more outlets, places to go for information, but not more in-depth reporting, more incisive, risky reporting -- Mr. Carroll's argument.

Yeah, and I would argue -- and reasonable people can disagree -- that the quality of the coverage would improve if he directed those resources toward the area where they have a core competency: Southern California. If there's a quality issue at the L.A. Times, the reason that exists is because he's trying to be all things to all people.

Yahoo! said The Washington Post and New York Times are examples of what newspapers should be doing in the future.

We agree completely. The Washington Post is focused on local. They own the Washington, D.C., story. They are all over things [in] Washington and Northern Virginia.

But The New York Times?

The New York Times has a unique position in having established itself, with [The] Wall Street Journal, [as] one of really two national newspapers. But they also own New York City; they own Wall Street coverage with The Wall Street Journal. They are all over business issues in advertising on Madison Avenue and in business on Wall Street.

They, of course, do a spectacular job of covering things like fashion, which people in New York care about. If we could change that method of operation and put it at the L.A. Times and then have a little bit more concern about shareholders, we'd have a win/win situation.

Dean Baquet [editor of the Los Angeles Times] said, "Wall Street's my enemy." [Merrill Lynch analyst] Lauren Rich Fine said Wall Street is his enemy.

I'm disappointed that he said that. He should not have said that. Dean is running a division of a company that is owned by pension plans, retirees. GM's pension plan owns stock in the Tribune Company. People are counting on appreciation in Tribune Company shares to fund their retirement.

He's saying it's the short-term profitability. He's saying if you invest the money necessary you'll have to live with low profits for a while.

On that point he's just wrong. The only people that are investing today are people who have a long-term outlook, like we are, Ariel. Our motto is "Slow and steady wins the race." Our mascot is the turtle. If we were concerned about events next week, we wouldn't own newspapers, because all the short-term news is bad. We believe this is an industry that's going to pay off as they migrate to the Internet and as they prove the power of their ability to be such a great place for advertisers to get this very attractive demographic, but it's not a short-term play.

Lauren Rich Fine again: "We've told our clients to stay on the sidelines until we figure out what the growth rate is, if there's a growth rate, but until then you really don't need to own the stocks," meaning newspapers and media companies in general.

No doubt about it. Wall Street hates the newspaper industry right now. No doubt about it. And that's, of course, what we like so much. This is a great contrarian opportunity. You don't do well as an investor by buying what everybody else likes. That's how you buy Internet stocks at the top. How you do well in investing is by buying good businesses when they're out of favor, and nothing is more out of favor right now than newspapers.

Not just Wall Street but Warren Buffett. Same thing?

Remember, Warren Buffett still owns The Washington Post. So Warren Buffett has made it clear that the business is not as good as it used to be. No doubt about it. But the stocks used to trade for 20 times earnings. Now they're trading for 10.5 times EPS [earnings per share] and 7.5 times cash flow.

What does that mean?

Warren Buffett is right that the businesses are not as good as they used to be. But the fact of the matter is the stocks have come down way more than is justified by the reduced growth rates in these companies. We think the market is overestimating the decline and underestimating the growth of interactive and Internet revenue.

We think those two factors are going to produce a much better outlook for these two companies than Wall Street thinks, or actually, in this case, even than Warren Buffett thinks.

This is a big bet on the Internet, that newspapers and newsgathering will survive and have some quality because the Internet, a method of delivery, is simply replacing trees and trucks.

That's part of the story, and it's happening today, ... and it's not a pipe dream. The revenues are growing 25 to 35 percent. Right now if you go online in Chicago, if there's a major event, the best coverage of news in Chicago online is chicagotribune.com. Just as the newspapers were able to create WGN Radio and then WGN TV, we think they're going to be able to move a significant part of the business to the Internet.

Produce enough revenue to maintain quality in the news they gather?

Absolutely. There is still going to be investigative news done in a not-for-profit format. The second in my analogy is history books. Most of the best investigative work done on history is done by people who just love it. The best Civil War books investigating what really happened at Gettysburg weren't done by people in companies or corporations; it was done by people who just love history. And I think that work will still be done.

A lot of what's done on the Internet today is done by people who are just interested in politics.

So you're telling people you can be poor and honest and make a difference?

There are a lot of people who are professors, who are not so poor, running a blog that gets Internet traffic. The CBS Dan Rather National Guard scandal was uncovered by bloggers uncovering the six-month investigation done by Dan Rather and his highly paid staff, so I reject the concept that only newspapers can do good work.

It's not necessarily just newspapers or television, I think, that's at question. It's a question of newspapers and broadcasters with the assets, the standing, to be able to do stories in depth, pay qualified people to do the story accurately, and stand up to those who don't like the story because of the facts in it. That's the danger that's felt in the newsroom --

Mike Royko in Chicago was the most widely read newspaper reporter in Chicago for 30 years, and all he did was investigate local stories. He was paid very well by local, for-profit corporations. But the reason it worked is because people wanted to read what he had to write. So the key is, your six-month study better be on a topic that people care about.

If they don't, then I would argue this society hasn't lost what you say it's lost. Mike Royko brought an important service to Chicago by investigating City Hall. He wouldn't have brought a lot to Chicago investigating a problem in downstate Illinois that really didn't affect people.

Do you think it would be good for the Tribune Company to sell the L.A. Times to one of the billionaires who seem to be interested?

Our position on this is that we think the Tribune Company has a very good board of directors which is going to make the right decision to maximize value. It does seem to us that there are a lot of people who are talking about paying a very big price for the L.A. Times for all the reasons that I've talked about -- the very strong cash flows, the opportunities to do better. There are people lining up to buy the L.A. Times, and if it is such a bad business, why are so many people willing to write multibillion-dollar checks to buy the L.A. Times?

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posted feb. 27, 2007

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