Turnaround Tuesday: GateHouse to Follow Other Print Organizations into Bankruptcy

After recording losses for several years, GateHouse Media Inc. is expected shortly to follow other print publishers into bankruptcy, as the audience for media continues to abandon print for the Internet and mobile devices. The anticipated move was announced by debt owner Newcastle Investments Corp. (NYSE: NCT), a unit of Fortress Investment Group LLC (NYSE: FIG), on Sept. 4 when the company said it would purchase the Dow Jones Local Media Group from News Corp. (Nasdaq: NWS) for $87 million. 

The deal included 33 local publications, which Newcastle said would be managed by GateHouse.

Newcastle owns about $626 million of Fairport, N.Y.-based GateHouse’s $1.28 billion in debt, according to filings with the U.S. Securities and Exchange Commission. The company is expected to file a prepackaged bankruptcy case. GateHouse listed $1.28 billion in liabilities as of June 30, a decrease from the $1.3 billion it listed as of Dec. 30.

As of June 30, GateHouse had $433.7 million in assets, and about $1.28 billion in liabilities.

“We are also seeing some further improvement in July. However, we remain very cautious on our near-term outlook as print advertising revenue, despite the improved trend, continues to decline in the high single-digit range and still represents the largest revenue category within our business,” GateHouse CEO Michael Reed says in an Aug. 1 company statement.

The company says it has experienced ongoing declines in print advertising revenue and increased volatility in an Aug. 1 SEC filing.

GateHouse publishes local print and online media in the U.S. Publications include the group of Wicked Local news websites based in Massachusetts, and local newspapers The Herald News, based in Fall River, Mass., the Saugerties Post Star, based in Saugerties, N.Y., and the Olney Daily Mail, based in Olney, Ill., and many other publications located in Arkansas, California, Colorado, Connecticut, Delaware, Illinois, Kansas, Louisiana, Massachusetts, Michigan, Minnesota, Missouri, North Dakota, Nebraska, New York, Ohio, Oklahoma, Pennsylvania, Tennessee and West Virginia.

Before the Dow Jones deal, Gatehouse published 77 daily newspapers, 235 weekly newspapers, 91 advertising-only publications, 434 locally-focused websites and six yellow-page directories. The Dow Jones purchase adds local newspapers the Cape Cod Times, based in Hyannis, Mass., and The Standard-Times, headquartered in Fall River, Mass., to GateHouse’s portfolio.

Before the Dow Jones deal, Gatehouse published 77 daily newspapers, 235 weekly newspapers, 91 advertising-only publications, 434 locally-focused websites and six yellow-page directories. The Dow Jones purchase adds the Cape Cod Times and The Standard-Times to GateHouse’s portfolio.

The company suffered a net loss of about $12 million for the quarter ended June 30, compared with a $2.6 million net loss for the quarter ended July 1, 2012. In the six-month period ended June 30, the company experienced a $31.6 million loss, compared with the $15.9 million loss it sustained in the same period a year earlier.

The company’s revenue for the second quarter was $119.6 million, down 5 percent from the same quarter the previous year, but up from the first quarter’s $110.9 million. Revenue growth was offset by declines in print advertising, according to GateHouse. Digital revenue, however, increased about 17 percent for the second quarter.

A GateHouse subsidiary, GateHouse Media Operating Inc., entered into an agreement on Feb. 27, 2007 with a syndicate of financial institutions led by Wells Fargo Bank NA, for a $670,000 term loan, which matures on Aug.  28, 2014. The company also entered into an agreement for a delayed-draw term loan facility of up to $250,000 that matures on Aug. 28, 2014 and a revolving credit facility for up to $40,000 that included a $15,000 sub-facility for letters of credit and a $10,000 swingline facility, which mature on Feb. 28, 2014.

GateHouse amended the delayed-draw term loan facility in May 2007 to increase the term loan to $275,000. In February 2009, the loan was amended again, and GateHouse’s borrowing limits under the revolving credit facility were reduced from $40,000, to $20,000, SEC filings show.

In April 2011, Wells Fargo resigned as administrative agent for the loans, and Gleacher Products Corp. was appointed. Due to certain restrictive covenants of the loan, GateHouse could no longer draw on the revolving credit facility. GateHouse doesn’t expect to be able to draw under that loan for the foreseeable future.

In response to the newspaper industry’s decline in revenue and profitability over the last several years, as the audience has shifted from print to the Internet and mobile devices, GateHouse continues to implement plans to reduce costs and preserve cash flow, including not paying cash dividends, reducing costs, restructuring programs and selling non-core assets.

“We believe our local advertising tends to be less sensitive to economic cycles than national advertising, because local businesses generally have fewer advertising channels through which to reach their target audience,” says the company in the SEC filing. “We also believe some of the declines are due to a secular shift from print media to digital media. We are making investments in digital platforms, such as online, mobile and applications, to support our print publications in order to capture this shift as witnessed by our digital advertising revenue growth.”  

Over the past few years the company has consolidated facilities as part of a plan to improve operations. GateHouse’s operating costs for the first quarter decreased $3.3 million to $65 million, , about 5 percent less than the same quarter in the previous year. The decrease was primarily due to a decrease in compensation, professional fees, newsprint expenses and supplies. Those decreases are a part of permanent cost reductions, as the company continues to consolidate operations to “improve the productivity of our labor force.”

If GateHouse’s restructuring is completed successfully through a prepackaged bankruptcy filing, Newcastle predicts that GateHouse’s revenues could climb from about $475 million for fiscal year 2013 to $522 million for fiscal year 2016.

A call to GateHouse was not immediately returned.

Several media companies have entered bankruptcy protection as a result of declining print revenues, including the parent company of Reader’s Digest, RDA Holding Co. Inc., and the Journal Register Co.

For the last edition of Turnaround Tuesday, see “Struggling Salon Tries to Increase Revenue.” 

For more troubled companies, see Mergers & Acquisitions’ Distressed Company Watch List.