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Investor Emerges as Big Player for Small Newspapers (2/24/16)

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Investor Emerges as Big Player for Small Newspapers (2/24/16)

Private equity-run chain snaps up assets as a sharp drop in prices drives wave of consolidation

By Lukas I. Alpert

The Foster’s Daily Democrat didn’t seem like an attractive takeover target.

The 142-year-old newspaper in Dover, N.H., had suffered an almost 50% decline in circulation in a decade to 12,000 a day and a precipitous drop in ad revenue.

But in late 2014, the family that had run the paper for five generations found an eager buyer: private equity-run newspaper chain New Media Investment Group, which has been snapping up similar assets nationwide.

The $5 million sale was one of many small deals in recent years amid an accelerating wave of consolidation in the highly fractured U.S. newspaper industry. The spectacular decline of print in the past decade has led many investors to turn their back on the industry, providing an opening for bargain hunters who believe newspapers still have value.

The U.S. newspaper industry is dominated by 11 big players including Gannett Co. , Tribune Publishing Co. , Wall Street Journal owner News Corp and New York Times Co. But 45% of the 41 million papers sold every day are titles owned by 200 smaller companies, according to the Alliance for Audited Media.

A move to roll them up is under way, driven by a sharp decline in prices. Last year, 70 daily newspapers changed hands in 27 transactions for $827 million, the highest total for the industry since the 2008 economic crisis, according to data compiled by merger-and-acquisition adviser Dirks, Van Essen & Murray.

New Media, a low-profile outfit managed by private-equity firm Fortress Investment Group LLC, has surfaced as one of the most aggressive consolidators, alongside USA Today owner Gannett and Warren Buffett’s Berkshire Hathaway Media Group.

New Media emerged in 2014 out of the bankruptcy of GateHouse Media and has quietly acquired more than 100 newspapers for $637.5 million during the past two years, bringing its total portfolio to 575 titles.

New Media nearly doubled its revenue in the third quarter of 2015 on a year-over-year basis to $312.1 million, putting it not far behind better-known companies like Tribune and the New York Times. The company is modestly profitable.

“With the changing environment the newspaper industry faces, scale really matters,” New Media Chief Financial Officer Greg Freiberg said at a recent investor presentation. “Looking ahead, our pipeline for acquisitions remains robust.”

The company has been involved in some bigger transactions—notably, its sale of the Las Vegas Review-Journal to casino magnate Sheldon Adelson in December—but largely focuses on low-priced, small papers that continue to generate solid cash flow. Many still have a lock on local advertising, which has protected them from digital competition that has sapped bigger dailies.

The company’s acquisitions over the past two years have included Southern California’s Victorville Daily Press for $8 million, the Providence Journal for $46 million, and the family-owned Erie Times-News for $11.5 million.

Foster’s Daily Democrat was typical of the dynamic in many small markets—a fixture in the community of 30,000 just 65 miles north of Boston that was struggling with the times. Over the past decade, online services like Craigslist had eroded its classified ad business. Circulation had declined steadily as younger readers migrated online. And the cost of building a robust Web presence was proving difficult to afford.

Joshua Foster, an anti-abolitionist Democrat in the then-staunchly Republican North, founded the paper after the Civil War with money he received in compensation when a drunken mob angered by his views tried to tar and feather him and destroyed the printing press of a previous paper he ran. Since then, the Daily Democrat has focused on local news like town council votes, crime and fundraisers. Despite its small circulation, the Daily Democrat is considered influential, with nearly every presidential candidate for decades paying a visit in hopes of snagging an endorsement in the New Hampshire primary.

“There had been a lot of nervousness in my family about how to manage and pay for the transition to the digital world,” said Patty Foster, Joshua’s great-great granddaughter. “We realized that [New Media] had a lot more resources to do this, so it just made better sense.”

Once New Media had acquired the paper, it did what it has done all over the country: cut costs. Ms. Foster said many in the Daily Democrat’s back office and distribution service lost their jobs as operations were combined with a New Media-owned paper in nearby Portsmouth.

At other papers, New Media has made significant cuts in newsrooms and among back-office staff, by centralizing copy editing, layout, ad sales, human resources and finance operations at an Austin, Texas, hub. When it acquired the Providence Journal in 2014, it laid off about 25% of the staff, union officials said. Employees at some papers in the Midwest that were part of the original GateHouse say they haven’t received raises in eight years.

A New Media executive said the moves reflect the challenges faced by the industry, but that the company is committed for the long haul. Looking forward, it is trying to build additional revenue streams by offering digital services such as website building and ad creation to small businesses in the communities where its papers operate.

Other private-equity firms and hedge funds have tried similar approaches in the past, with mixed results. But for investors, New Media’s strategy has so far paid off, with the company’s stock price rising more than 20% since going public in 2014, generating a high dividend yield of 9% (compared to 2.2% for Gannett and 1.3% for the New York Times.)

“New Media has been perhaps the most efficient and systematic consolidator of small-market newspapers in America,” said Jim Friedlich, head of Empirical Media, a consultancy that advises media companies but hasn’t worked with New Media. “So far this seems to be working well for their investors. Whether it is good for their news products and the communities they serve, time will tell.”

The key has been the steep decline in prices, which has enabled New Media and others to buy without being hobbled by debt. In 2007, GateHouse spent $410 million for four small newspapers with combined daily circulation of 125,000. Last year, Gannett reached an agreement to spend $280 million for Journal Media Group ’s 15 papers with circulation of 675,000.

GateHouse went bankrupt in 2013 after amassing $1.28 billion in debt following a string of deals in which it regularly spent more than 10 times earnings before interest, taxes, depreciation and amortization (Ebitda), according to James Goss of Barrington Research. Since it emerged from bankruptcy as New Media, it now aims to spend between 3.5 and five times Ebitda.

“This has only become possible because the industry is so hated and so out of favor,” said one New Media executive, referring to the steep decline in the circulation and valuations of newspapers.

Write to Lukas I. Alpert at lukas.alpert@wsj.com


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