How GateHouse Loots its Papers

[LanceyHoward]

I stumbled across this 2017 article by the invaluable Ken Doctor,

Newsonomics: Softbank, Fortress, Trump – and the real story of Gatehouse’s boundless ambition

To summarize and expand. Gatehouse came out of bankruptcy in 2013. A management contract was signed at that time where Fortress, a large hedge fund, would serve as manager.

So Fortress controls the company through this contract. According to Doctor Fortress only owns 72,000 shares wort about 1.3 million dollars.

But Fortress receives a payment of 1.5% of the equity of New Media every year. In 2015 and 2016 that worked out to more than nine million dollars annually. Fortress also gets reimbursed for reasonable expenses which have been more than a million dollars a year.

Fortress also receives incentive payments. If the cash flow of the company exceeds 10% of the equity Fortress gets 25% of the excess. They received 9.6 million in 2016 and 30.3 million dollars in 2015.

So it is in the interest of Fortress to grow Gatehouse. Let's say that Gatehouse sells fifty million dollars of stock to buy Austin. Fortress gets 1.5% a cash bonus or $750,000 off the top.

It has been reported that Gatehouse is paying seven times cash flow. Which means that Austin is cash flowing seven million dollars a year. Which means Fortress gets another $500,000 because the multiple is less than ten. .

So Fortress can pull out 1.5 million in cash just by buying Austin. Where will the cash come from to pay this? From firing people.

And what if Gatehouse eventually blows up and goes broke (it has already been in bankruptcy once). Fortress loses their 1.3 million dollar investment. Big deal.

 

[The Big Ragu]

I just skimmed your link. But your post paints a picture that has nothing to do with reality. 1) First, Fortress Investment Group isn't a hedge fund. It's a private equity firm. 2) Fortress didn't show up to "manage" Gatehouse in 2013. Fortress bought Liberty Group Publishing in 2005, which it renamed Gatehouse. It paid $527 million at the time -- it has lost pretty much all of that money. 3) Gatehouse spent the next 7 or 8 years buying up failing newspapers, at considerable debt, trying to build a media empire from others' ashes. They went nuts buying everything in sight, expanding to more than 300 newspapers. They weren't successful, which is why the company declared Chapter 11 bankruptcy in 2013. They had accumulated more than a billion dollars of debt, and their newspapers were becoming increasingly more worthless by the day. 3) You seem to think that Fortress is into Gatehouse for $1.3 million, with this narrative that they are in "a heads I win, tails I win" situation. Um, no. Trust me, that is ridiculous. Fortress got into this thing for more than half a billion dollars. It made a huge gamble that it could succeed in the newspaper business. Their original half a billion dollar + equity investment is close to worthless. They took a huge bath.

 

[Tarheel316]

I just skimmed your link. But your post paints a picture that has nothing to do with reality. 1) First, Fortress Investment Group isn't a hedge fund. It's a private equity firm. 2) Fortress didn't show up to "manage" Gatehouse in 2013. Fortress bought Liberty Group Publishing in 2005, which it renamed Gatehouse. It paid $527 million at the time -- it has lost pretty much all of that money. 3) Gatehouse spent the next 7 or 8 years buying up failing newspapers, at considerable debt, trying to build a media empire from others' ashes. They went nuts buying everything in sight, expanding to more than 300 newspapers. They weren't successful, which is why the company declared Chapter 11 bankruptcy in 2013. They had accumulated more than a billion dollars of debt, and their newspapers were becoming increasingly more worthless by the day. 3) You seem to think that Fortress is into Gatehouse for $1.3 million, with this narrative that they are in "a heads I win, tails I win" situation. Um, no. Trust me, that is ridiculous. Fortress got into this thing for more than half a billion dollars. It made a huge gamble that it could succeed in the newspaper business. Their original half a billion dollar + equity investment is close to worthless. They took a huge bath.

Don’t you just feel terrible for them?

 

[The Big Ragu]

Don’t you just feel terrible for them?

Not sure what your point is.

Two things:

1) I understand that the death of newspapers is a particularly touchy subject for a lot of people on here. It's natural. But facts matter. Gatehouse, under Fortress' management, went nutso buying up newspapers, at a time that newspapers were being destroyed by the Internet. Their gambit didn't fail because they were looting the newspapers -- that made me scratch my head when I saw the thread title. It failed because they accumulated more than a billion dollars of debt buying up businesses in a dying industry at a time that death started to accelerate. They started to drown in that debt, because the businesses started racking up bigger and bigger losses. They essentially invested in the Titanic and had a strategy of fixing it by buying the Hindenburg.
2) That said. ... I know a little bit about Fortress. I am sure that Wes Edens (who runs Fortress, which trades publicly) managed to finagle some crazy management fees from the mess his company made of Gatehouse, and I am sure he personally gets compensated nicely. I'm not losing sleep for him, if that is your question. But the investment itself lost a lot of money. It's just a fact. At the end of the day it is also between him and his investors -- the institutional investors (which by the way, might be managing pension funds for a lot of regular people) and private investors who have forked over cash to Fortress expecting a return on their investment. They can decide for themselves whether they profit overall from investing with Fortress.

 

[LanceyHoward]

I just skimmed your link. But your post paints a picture that has nothing to do with reality. 1) First, Fortress Investment Group isn't a hedge fund. It's a private equity firm. 2) Fortress didn't show up to "manage" Gatehouse in 2013. Fortress bought Liberty Group Publishing in 2005, which it renamed Gatehouse. It paid $527 million at the time -- it has lost pretty much all of that money. 3) Gatehouse spent the next 7 or 8 years buying up failing newspapers, at considerable debt, trying to build a media empire from others' ashes. They went nuts buying everything in sight, expanding to more than 300 newspapers. They weren't successful, which is why the company declared Chapter 11 bankruptcy in 2013. They had accumulated more than a billion dollars of debt, and their newspapers were becoming increasingly more worthless by the day. 3) You seem to think that Fortress is into Gatehouse for $1.3 million, with this narrative that they are in "a heads I win, tails I win" situation. Um, no. Trust me, that is ridiculous. Fortress got into this thing for more than half a billion dollars. It made a huge gamble that it could succeed in the newspaper business. Their original half a billion dollar + equity investment is close to worthless. They took a huge bath.

You are telling me that at one time before 2013 Fortress investments actually invested in newspapers. This was a bad idea and they lost money as the company went into Chapter 11. Post bankruptcy Fortress adopted a new, more lucrative model of corporate looting.

According to the article I linked by by Ken Doctor which was written in February, 2017 Fortress owned about 74,000 shares. I also checked the 2016 10-K and according to Footnote 16 Fortress owns 1.3% of the common equity of NMI, which works out to about 74,000 shares. At a market of 16 bucks a share that is an investment of about 1.3 million dollars. So that is the reason I think that.

I will concede that Fortress is a private equity fund rather than a hedge fund.

 

[The Big Ragu]

Fortress put itself $527 million into what proved to be a crummy investment, which they made worse to the tune of $1 billion plus of debt in a failed bid to somehow grow their way out of it. It ended in bankruptcy. I don't know Ken Doctor. But anyone who would start a narrative POST bankruptcy, to somehow try make more than a half billion dollars of blown equity into a story about that investor looting the company is either dishonest or clueless (put charitably).

I am working from memory, but I believe the real problem with Fortress in the whole thing was that they tried to hide behind bankruptcy while wanting to keep borrowing to make more acquisitions (in itself nuts). And their creditors (rightfully) had a huge problem with it. I can't remember precisely how the whole thing got resolved.

I have no idea where in Fortress' 10-K (Fortress does trade publicly) that 74,000 share / $1.3 million stuff comes from. But what it would really suggest is that a $527 million original investment was worth $1.3 million when they did that filing with the SEC. Take out whatever exhorbitant management fees Fortress probably extracted over the years, and the whole "hedge fund, "contract" to "manage," "looting" thing is still ridiculous. They lost hundreds of millions of dollars by trying to be newspaper moguls.

 

[Tarheel316]

Fortress put itself $527 million into what proved to be a crummy investment, which they made worse to the tune of $1 billion plus of debt in a failed bid to somehow grow their way out of it. It ended in bankruptcy. I don't know Ken Doctor. But anyone who would start a narrative POST bankruptcy, to somehow try make more than a half billion dollars of blown equity into a story about that investor looting the company is either dishonest or clueless (put charitably).

I am working from memory, but I believe the real problem with Fortress in the whole thing was that they tried to hide behind bankruptcy while wanting to keep borrowing to make more acquisitions (in itself nuts). And their creditors (rightfully) had a huge problem with it. I can't remember precisely how the whole thing got resolved.

I have no idea where in Fortress' 10-K (Fortress does trade publicly) that 74,000 share / $1.3 million stuff comes from. But what it would really suggest is that a $527 million original investment was worth $1.3 million when they did that filing with the SEC. Take out whatever exhorbitant management fees Fortress probably extracted over the years, and the whole "hedge fund, "contract" to "manage," "looting" thing is still ridiculous. They lost hundreds of millions of dollars by trying to be newspaper moguls.

They gambled and lost. Meanwhile, a lot of good people lost jobs because of them.

 

[LanceyHoward]

Fortress put itself $527 million into what proved to be a crummy investment, which they made worse to the tune of $1 billion plus of debt in a failed bid to somehow grow their way out of it. It ended in bankruptcy. I don't know Ken Doctor. But anyone who would start a narrative POST bankruptcy, to somehow try make more than a half billion dollars of blown equity into a story about that investor looting the company is either dishonest or clueless (put charitably).

I am working from memory, but I believe the real problem with Fortress in the whole thing was that they tried to hide behind bankruptcy while wanting to keep borrowing to make more acquisitions (in itself nuts). And their creditors (rightfully) had a huge problem with it. I can't remember precisely how the whole thing got resolved.

I have no idea where in Fortress' 10-K (Fortress does trade publicly) that 74,000 share / $1.3 million stuff comes from. But what it would really suggest is that a $527 million original investment was worth $1.3 million when they did that filing with the SEC. Take out whatever exhorbitant management fees Fortress probably extracted over the years, and the whole "hedge fund, "contract" to "manage," "looting" thing is still ridiculous. They lost hundreds of millions of dollars by trying to be newspaper moguls.

The money that Fortress lost pre bankruptcy is a sunk cost. Though I suspect it as not all their money but whatever.

The numbers I used are from the footnotes of the New Media Inc, which is the Gatehouse parent, and trades publicly.

I helpfully include the excerpt from the 2017 10-K, which I just realized was released.

"Fortress and its affiliates owned approximately 1.3% of the Company’s outstanding stock and approximately 39.5% of the Company’s outstanding warrants...The Company recognized $10,622, $9,756, and $9,438 for management fees and $11,654, $9,621, and $30,306 for incentive compensation within selling, general and administrative expense, and $9,195, $25,262, and $8,862 for incentive compensation was paid to Fortress during the years ended December 31, 2017, December 25, 2016, and December 27, 2015, respectively. In addition, the Company recognized expense for reimbursable amounts of approximately $1,567, $1,763, and $1,041 for the years ended December 31, 2017, December 25, 2016, and December 27, 2015, respectively"

New Media has a market cap of 820 million dollars. So that means the equity value would be about 11 million (I missed a zero). But Fortress pulled out over 22 million in base compensation, performance bonuses and expenses in 2017 alone. Do you think their chief economic interest today (not pre bankruptcy) is appreciating their small equity stake or the cash they can pull out?

If you think I am misrepresenting the situation please go through footnote 16 and the management agreement (at the end of the 2016 10-K) and let me where I went astray.

 

[The Big Ragu]

They gambled and lost. Meanwhile, a lot of good people lost jobs because of them.

1) Who is the they that "gambled and lost"? I mean, among Fortress' shareholders during the time was the State Teachers Retirement System of Ohio. There were Fidelity Mutual Funds that owned A LOT of shares in Fortress. I found your "don't you feel just terrible for them" thing really trite, although I don't think you understand just how trite you are being. I mean, when some teacher is ready to retire 15 years from now, and their underfunded pension that participated in the losses tells them they are SOL, will you be flip about it?
2) A lot of good people may or may not have lost jobs "because" of Fortress. Private equity firms often make messes of their investments, because they get involved in businesses they don't understand. Fortress, in particular, hasn't been a great performer. But if you have this narrative in your head that 300 newspapers were swimming along until a private equity firm came and looted them. ... essentially the first post on this thread. ... it's just nonsensical. Those newspapers were getting destroyed by a changing world with or without Fortress buying Liberty Group Publishing, creating Gatehouse from it and putting itself into massive debt to buy up a boatload of other newspapers as the newspaper business was going to pot.

Lancey, you are trying to discuss something you seemingly don't understand. Your original post was a story about the OWNER of Gatehouse -- which had put up more than half a billion dollars of its investors' money for that equity (and proceeded to take a huge loss) -- being a contractor of some sort that showed up post bankruptcy to manage the company with no skin in the game, and proceeded to loot the company. You had no clue.

Now you are trying to gump around what I posted by pulling footnotes out of public filings from years after what you were trying to discuss in the first place. Just look at the first thing you typed in that last post: "The money that Fortress lost pre bankruptcy is a sunk cost. Though I suspect it as not all their money but whatever. "

1) Most owners of something that loses most of its value, don't simply throw up their hands and say, "Oh well. It's a sunk cost." They try to salvage what they can from their failure. And of course, anyone who writes something about them looting the company, without any mention of how the company ended up in bankruptcy, including the half a billion dollars the "looters" had lost on BUYING the damned company, is either being dishonest or is so dense they shouldn't be writing about it.

2) You "suspect it as not all their money but whatever," eh? What does that even mean? I mean, before selling itself to Softbank, Fortress was one of the few private equity firms that traded publicly -- which might actually be a line of attack someone intent on making it into a boogyman might try, because Wes Edens sold shares at a premium when they went public (right before the financial crisis), and by the time they sold themselves they were worth a fraction of what he had cashed in at (in large part because of failed investments like this one). But just to clue you in about the "not all their money but whatever." That money might have been yours. ... If you own any mutual funds, say in a 401(K) or IRA. Anyone who owned shares in Fortress took part in the loss we're talking about (or as you have it, was looting Gatehouse).

 

[LanceyHoward]

I continue to concede that a lot of money was lost by the original bankruptcy. I don't think it really matters who lost the money pre-bankruptcy. But I am curious. How much did the Ohio Teachers Retirement Fund get out of the the 21 million dollars Fortress, which is now owned by a Japanese telephone company, collected from Gatehouse/New Media in 2017.

You write that Fortress foolishly continued to buy newspapers as the market for papers declined. That may have been foolish. But given the way the contract presented in the 2016 10-K is written to is in the best interests of Fortress to buy up every newspaper in sight that sells for less than 10 tines cash flow (defined in the management agreement as earnings plus intangible expenses) because of the way their bonus clause is written (I helpfully told you where to find it. Read it if you don't believe me).

The contract is written to incentivize a roll-up where a company goes on an acquisition spree and centralizes an industry (an apparently successful example would be Sinclair Broadcasting. A much less successful example would be Iheart Radio. But the contract gives lucrative cash bonuses for getting bigger. If at the end of the day it all goes boom then Fortress still makes a hell of a lot of money.

Last year Fortress collected fees of 21 million from a company that made an operating profit of 35 million dollars. If the company goes boom tomorrow their incremental equity loss is 11 million dollars. So there interest is clearly in maximizing their management fee (see management contract).

I know that is not directly my problem because I own neither the debt nor equity of New Media. But motivations of the management of one of the largest newspaper chains in America might be of some interest to some of the people on this board.

You also seem to resent the fact that I went through the footnotes of a corporate report to confirm something. Why is that ever a bad idea?

 

[TheSportsPredictor]

Poor Akron.

Gatehouse Media purchases Akron Beacon Journal

 

[SoloFlyer]

It sickens me to imagine what Gatehouse could do for its current papers with all the money it's using to purchase new properties.

Raises for staffers who haven't had one in years. Dynamic web sites and multimedia equipment to capture new audiences. New hires to lessen the burden on current staffers. Better benefits.

Nope.

Just a spending spree on real estate and branding.

 

[DanOregon]

Aren't most of these purchases just LBOs with an assumption of debt and an IOU based on future earnings? (Usually paid to some company that will front the cash)

 

[LanceyHoward]

Gatehouse had revenue of 1.342 billion and reported a loss in FY 2017. Fortress, which has the management contract, took out over 10 million in base compensation and a performance bonus of another 10 million or so. Much of the cash is going to them.

 

[LanceyHoward]

Poor Akron.

Gatehouse Media purchases Akron Beacon Journal

Gatehouse has owned Canton for a while. Last year Gatehouse bought Wooster. How much of the Wooster staff is still there?

I suspect Gatehouse is going to combine Akron and Canton in a similar fashion.

 

[LanceyHoward]

Many years ago when I was in an MBA program we learned about a corporate milking strategy. This was developed by some consulting firm (BCG, I think). The idea was that you identified a dying business and pulled as much cash as possible out. While no one at Gatehouse has said that about newspapers I think that is the view of Fortress. The reason I think that is I don't see Gatehouse trying to develop a web strategy.

 

[The Big Ragu]

Aren't most of these purchases just LBOs with an assumption of debt and an IOU based on future earnings? (Usually paid to some company that will front the cash)

I am not certain what the original structure of Fortress' purchase of Liberty Publishing was. Fortress was a private company then. I don't believe it was an LBO, but I am not 100 percent certain about how they financed it. I do know that at the time the amount they paid was considered too high by a lot of people. Even if there was any amount of debt financing for the purchase, the bulk of the massive debt they had by the time they declared bankruptcy came after the acquisition. They went insane borrowing and buying up newspapers. Hundreds of them. It's an old chestnut from the private-equity playbook. They look for very slow-growing, but profitable industries. Things like railroads, chemical companies, etc. They add a ton of debt , and then pay their investors a dividend using the ongoing cash flow. It's not about the growth. It's about whatever cash the company can throw off and the owners collecting their dividend.

That cash flow dried up, as we all know, as the newspaper business went to pot. Which left them with a massive amount of debt and trouble servicing it. As I said in an earlier post, in hindsight they bought the Titanic and then tried to fix it by buying the Hindenburg. It was a disaster for them.

What is kind of interesting in the Gatehouse saga is the original owners that Fortress bought from. Most of those newspapers had started out as part of the Conrad Black empire. Hollinger, Black's company, was looking to divest itself of a couple of hundred community newspapers in the late 90s, and an attorney who worked for the company found the financing (via another private equity firm) to buy them up. They formed Liberty Publishing Group. Newspapers were peaking when they formed the company, and ad revenue was good. They owned several hundred community newspapers and shoppers, and I am sure cash flow was decent. When they sold to Fortress, they probably saw the handwriting on the wall for newspapers, and being a step ahead of the game, they essentially found the right sucker.

They were the ones who cashed out of the thing with a huge pay day. Fortress took a bath on its foray into the newspaper business.

 

[goalmouth]

Railroads, exactly. Hedge fund Mantle Ridge owns CSX, and that continues to be an unmitigated disaster for its employees and customers.

 

[The Big Ragu]

Railroads, exactly. Hedge fund Mantle Ridge owns CSX, and that continues to be an unmitigated disaster for its employees and customers.

It's a little different. CSX trades publicly. Mantle Ridge owns less than 5 percent of the company, but it is an activist investor. It accumulated that stake, got board seats and put in their own CEO.

The founder of Mantle Ridge, Paul Hilal, came from Pershing Square, which is a big hedge fund run by a douche named Bill Ackman. Pershing Square had pulled the same exact play with Canadian Pacific Railway. They accumulated a stake, won a proxy battle and installed the same CEO that Mantle Ridge put in at CSX. He revamped the railroad and the stock price ripped. The whole thing netted Pershing Square about $2.5 billion. This was back when Bill Ackman was on top of the world. He's had a tougher time of it the last few years, including taking a huge short position in Herbal Life, only to have Carl Icahn take the opposite side of the trade and torture the living hell out of Ackman with it. Ackman is such a douche, and the whole thing played out publicly enough, that it was pure entertainment. Icahn had the time of his life rubbing it in and turning the screws on Ackman for maximum pain. Ackman took a huge loss on the trade.

 

[goalmouth]

Good commentary. The agent for all that railroad chicanery was E. Hunter Harrison, who led Illinois Central, CN and CP before being installed by Mantle Ridge at CSX. Despite having advanced COPD that soon required a portable oxygen tank, the Mantle-controlled board approved his hire and compensation north of $300 million. He quickly implemented his Precision Scheduled Railroading operating plan that had been successful at the previous linear railroads. CSX is more of a spaghetti bowl, but that didn't stop him from slashing thousands of jobs (with an announced 3,000 more jobs to go in the next two years), running fewer but much longer trains, planning to sell off up to 40% of the system, and pissing off just about all of CSX's customers to the point where the Surface Transportation Board called CSX on the carpet to explain itself.

Harrison died a few months ago after less than a year on the job, but his legacy with shareholders lives on: The other Class 1 railroads are similarly reducing overhead and abusing customers to the point where the STB has demanded service reports from all of their CEOs.