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Debt, other challenges confront GateHouse

Rochester Business Journal
August 19, 2011

GateHouse Media Inc., along with the rest of the daily newspaper industry, continues to struggle to make a home for itself online. At the same time, the company grapples with an uncertain economy, more than a billion dollars of debt, falling revenues and a smaller workforce.

With debt nearly 14 times its cash flow for the last 12 months, GateHouse is the most highly leveraged of any publicly traded newspaper company, California-based newspaper analyst Alan Mutter said. Most publishers, he said, are trying to keep their debt from exceeding two to three times cash flow.

The company's long-term debt, which is due in 2014, totaled nearly $1.2 billion, the company reported with its second-quarter results late last month.

"GateHouse is earning a little bit of money, but not enough to cover interest payments or pay down that huge debt," said Rick Edmonds, a media business analyst at the Poynter Institute, a journalism organization.

Revenue for the second quarter was $134.4 million, down 6.4 percent from a year earlier. The company's net loss shrank from $5.3 million, or 9 cents a share, to $5 million, or 8 cents a share.

In 2010, revenue was $558.6 million, down 4.5 percent; operating costs declined by $35.7 million, or 7 percent. GateHouse's net loss in 2010 totaled $26.6 million, or 44 cents a share, versus $530.6 million, or $9.18 a share, in 2009.

To expand revenues, the company began experimenting this year with different pay models, pay walls and meters to monetize access to its news websites. Its goal is to recapture some circulation revenue lost to readers who have moved from print to digital.

It is one of five major focus areas for the company's transformation, GateHouse CEO Michael Reed said. Four of the focus areas are revenue-oriented. Digital subscription revenue is a cornerstone of that plan.

"We're following a model that is very similar to what the New York Times rolled out a few months ago," Reed said.

The model provides free access to newspaper websites up to 15 to 20 times a month. Once a reader accesses stories more than that, he or she must pay for content for the remainder of the month.

"We like that model because our heaviest users, the ones that really enjoy the content, are the ones who pay for it, and the light users are not charged, so we don't drive those people away," Reed said.

The model has been rolled out to a dozen markets. By the end of the year, 50 of the company's largest daily newspaper markets will be using the system, including the Daily Messenger in Canandaigua. The company has 86 daily newspapers.

Cutting or growing

One former journalist and GateHouse employee turned teacher and blogger said that for the model to work, the news must be compelling enough for people to pay for, and with the cuts at the company, covering breaking news is difficult or impossible.

Randy Turner was managing editor of one of GateHouse's newspapers, the Carthage Press in Missouri, from 1993 to 1999. The people responsible for his leaving are no longer connected to the company, he said, and he is interested in GateHouse now because he covers media topics for his blog.

"The news quality at GateHouse newspapers has fallen dramatically over the years. Part of it has to do with the continuing cuts the company has made," Turner said. "The (Carthage) Press, for instance, which had five on its news staff in 1999, is down to essentially three, sometimes two, putting out five newspapers a week."

GateHouse reported 5,239 full-time employees in 2010, down from 5,720 in 2009 and 6,538 in 2008.

Reed said the company does not envision further employment reductions. Its plan mainly is focused on generating revenue. The fifth area of focus in its transformation is cutting costs, he acknowledged, but only by regionalizing or centralizing back-office functions, not newsroom functions.

"In our local markets, our newspaper markets, what we actually want to grow, not cut, are the resources towards gathering the best local content in the community and our local sales efforts. Those are areas that we feel are the real strength locally, and in order to enhance those areas in a tough revenue environment, we have to take the core back-office functions and try to do those more efficiently," Reed said.

Other areas of focus for the company's transformation plan are digital advertising revenue growth and new business development.

"We've invested here a couple million dollars into new business development. We have some businesses in the pipeline we're going to launch, and then the fourth revenue area is the stabilization of print through a complete overhaul in how our sales processes work from start to finish," Reed said.

Despite reduced operations and changes to revenue models, GateHouse and other newspaper companies likely will continue to lose revenue, said Mike Simonton, a newspaper analyst with Fitch Ratings Ltd.

"While other industries bottomed out in 2009 or early 2010, newspapers have yet to turn the corner," Simonton said. "The lack of stabilization emphasizes that the industry is in secular rather than cyclical decline.

"Highly profitable real estate, employment and auto print classified advertising is shifting online permanently even in small markets where GateHouse focuses," he added. "Online advertising for newspapers hasn't been as much of a bright spot as they hoped. It's not possible to support the cost structure of the print operation and the debt-loaded balance sheets these companies have with online revenue only."

Debt concerns

GateHouse still covers its interest payments, Simonton said, but it is a distressed company with more than $1 billion in debt.

"There's no chance the company can repay its debt as it comes due from internally generated sources," he said.

The company instead will rely on capital markets to refinance its loan in 2014, Simonton said, but it remains unclear whether capital providers will keep lending to the company, given the industry's uncertainty.

Reed understands the concern.

"I think there is always concern when any company has debt that needs to be refinanced in some future year, because you never know what the environment will be at that particular time," Reed said.

"The fact for GateHouse right now is that we're still three years away from when that debt is due. Three years in this economy is a lot of time," he added. "The stock market dropped 17 percent in four weeks, so four weeks from now it can be up 17 percent. Things seem to move at an unbelievably fast pace in today's economy, so three years is still a ways away."

There are other reasons to take comfort, he said. One is that historically newspapers have had access to financing because of strong cash flows and margins.

"GateHouse still produces strong cash flows today and good margins, as most newspapers do, so that gives us some level of comfort that we'll be able to do something in three years," Reed said. He also noted that McClatchy Newspapers "about a year or year and a half ago went out and did an amendment and an extension in the refinancing of their debt, extending things out to 2017."

Another newspaper company, Lee Enterprises Inc., which is similar in size and market focus to GateHouse, also is looking to amend and extend its credit agreement. And Lee, Reed said, has a similar debt load.

But most importantly, Reed said, GateHouse has an operating plan that will transform it into a multimedia business with stronger revenue streams.

"We hope in three years we'll be a company that's a lot less exposed to just pure print advertising and that that will be an attractive business model to lenders in the credit markets as we transform this business," he said.

Executive bonuses

Because of the transformation effort and the caliber of talent necessary to steer it, Reed said, the company paid bonuses in 2010 despite its substantial debt.

Reed, who received a $500,000 salary and a $500,000 bonus in 2009, last year received a discretionary bonus of $750,000, in addition to his $500,000 salary.

Other GateHouse executives who got bonuses include the chief financial officer, who received $160,000, and the president and chief operating officer, who received $250,000. All the bonuses are discretionary, to be paid in common stock or cash or a combination of both.

These bonuses-as opposed to non-equity incentive compensation, which is generated from some pre-established formula-are determined at the board's discretion, explained Graef Crystal, an author and expert on executive compensation. These days, Crystal said, discretionary bonuses are common no matter what the economy looks like.

"It's about as hard to zero out a bonus for a top executive as to kill Count Dracula," he said.

It is not unusual for executives to make bonuses if they hit goals even while their company's performance remains weak, said Edmonds of the Poynter Institute.

The executives at GateHouse seem competent, Edmonds said, noting that Reed is chairman of the Newspaper Association of America.

The bonuses and other benefits that GateHouse has offered them are based solely on their ability to cut expenses, former Carthage Press managing editor Turner claims.

Reed disputes that, however. Bloggers tend to focus exclusively on the negative, he said, and GateHouse has outperformed many industry peers. Even though revenue was down in 2010, earnings before interest, taxes, depreciation and amortization rose.

Performing well in a tough economic environment earns compensation, even in the newspaper industry, Reed said, and GateHouse executive bonuses are in line with those of peers such as Lee Enterprises executives.

GateHouse needs a top-notch management team in an industry that depends on transformation for its survival and at a company that must grow, he said.

"I would liken it to if you were about to get on an airplane and you knew you were flying into a tremendously turbulent storm, you'd want pretty good pilots," he said.

"It's the same things for the board of directors here. These are very tough economic times."

8/19/11 (c) 2011 Rochester Business Journal. To obtain permission to reprint this article, call 585-546-8303 or e-mail service@rbj.net.


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