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Thursday, Sept. 12, 2013 05:13 pm

Bankrupt GateHouse still bullish

Last week’s announcement that GateHouse Media, parent company of the State Journal-Register, will declare bankruptcy sounded a bit like déjà vu all over again.

GateHouse put the best face it could on a festering financial disaster of epic proportion, entirely avoiding the word “bankruptcy” in an SJ-R story that carried a GateHouse Media byline. The company, which has $1.2 billion in debt due next year, has struck a deal with creditors who can get either 40 cents on the dollar or stock in a new publicly traded company prospectively called New Media.

Convincing GateHouse’s biggest creditor to agree to the deal wasn’t tough, given that the biggest creditor is Newcastle Investment Corp., a real estate investment company that is managed by Fortress Investment Group, a private equity firm that created GateHouse in 2006 and is its largest stockholder. Newcastle owns 52 percent, or $626 million, of the GateHouse debt and will convert its debt to stock.

The bankruptcy announcement wasn’t surprising, given the amount of debt and GateHouse’s shaky finances. The shocker was the same-day announcement that Newcastle is buying a string of publications, including eight daily and 15 weekly newspapers, from News Corp, the company that publishes the Wall Street Journal, for $87 million.

It’s a lot of newspapers for a publicly traded company that’s supposed to be in the real estate investment business. In fact, it is too many newspapers for such a company under the federal tax code, which conveys certain tax advantages to so-called real estate investment trusts, which must keep money in real estate as opposed to other interests or risk losing those advantages. And so Newcastle plans to spin the newspapers off into the new firm called New Media that would include GateHouse, with Newcastle stockholders getting one share of New Media stock for every share of Newcastle they own.

It amounts to Fortress, via Newcastle and GateHouse, doubling down on the billion-dollar bet it made at exactly the wrong time when the newspaper company borrowed big to buy a slew of newspapers, including the SJ-R, while the price was relatively high and the economy was poised to go into the toilet. Thanks to dwindling ad revenue, GateHouse remains in a slump, with $77.4 million in net losses during the past three years, including a loss of $29.8 million last year.

“It does seem like, from 10,000 feet, when people look at this they say ‘Wait, what are they doing?’” says Jason M. Stewart in an interview with Illinois Times. Stewart is an analyst for Compass Point Research & Trading who follows Newscastle stock. “There’s a lot of risk between now and the spinoff (of New Media). … I don’t know that this newspaper idea will work or won’t work.”

Stewart said the deal wasn’t a complete surprise. Newcastle this year began buying GateHouse debt for between 30 and 40 cents on the dollar, he said.

“Parts of it were expected, parts of it certainly were not,” Stewart said. “We knew that there was this esoteric investment opportunity with Newcastle. About three weeks back, we figured out it was GateHouse. We didn’t know they would do an acquisition (of newspapers). We didn’t think it would be a spinoff.”

The papers purchased from News Corp. are published in seven states, including Oregon, California, New York, Massachusetts, New Hampshire, Pennsylvania and Maine. In announcing the deal, Newcastle said that News Corp. “under-managed” the publications, reducing expenses by just 6 percent since 2010 while not capitalizing on digital opportunities. Newcastle says it has already figured out how to reduce expenses at the newly acquired properties by $10 million.

Newcastle has big plans for New Media. The planned spinoff company could invest as much as $1 billion buying publications during the next three years, according to Newcastle executives who say that newspapers are bargains.

Where will New Media get $1 billion?

“It’s a great question,” Stewart says. “They’re going to need to raise new capital. There’s not enough capital in New Media to do anything.”

If history is any guide, the new company will look to Wall Street, just as GateHouse did in 2006 when it sold stock in an IPO at $20 per share, with Fortress retaining 60 percent ownership. The stock today is virtually worthless, dropping from five cents a share to three cents on the day the bankruptcy was announced. It fell even further in ensuing days, dropping to as low as a penny.

Still, Newcastle insists that local newspapers are a sound investment.

“Everyone wants to see who is driving drunk and whose kid did well in the high school volleyball game,” Wesley Edens, Newcastle chairman, told analysts during a conference call last week.

While Newcastle says circulation revenue has stabilized during the past three years, circulation, in raw numbers, has plummeted in Springfield, according to the Alliance for Audited Media, which tracks circulation for American newspapers. According to the most recent figures submitted to the alliance by the SJ-R, the paper in March had a Sunday paid circulation of 42,962 and a daily circulation of 38,544. Three years ago, the SJR had a Sunday circulation of 60,277 and a daily circulation of 50,071.

What bankruptcy and a spinoff might mean for the State Journal-Register isn’t clear, although officials with the union that represents newsroom employees don’t foresee major changes.

“The good news is that these people are committed to publishing newspapers and operating websites off those newspapers – there’s no question they’re committed to it,” says Jeff Gordon, president of the United Media Guild that represents SJ-R newsroom employees. “The guild’s happy that they’re committed to the industry. It could be worse. It (the debt) could be held by an investment firm that has no interest in operating a media company.”

Contact Bruce Rushton at brushton@illinoistimes.com.


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