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March 6, 2018, 8:10 p.m.

Newsonomics: GateHouse goes bigger, buying Austin’s daily and eyeing the Palm Beach Post

The company — a giant bet on acquisition, consolidation, and cost-cutting — now owns more than 1 out of 10 American daily newspapers. What it plans to do with them remains unclear.

GateHouse Media, though suffering through all the same revenue woes as its peers, is about to get significantly bigger.

Earlier today, GateHouse officially became the winner in the auction of the Austin American-Statesman; the newsroom of a little more than 100 staffers was told in mid-afternoon. I had reported that was the highly likely outcome last month. Just as significant, the Fortress Investments-directed chain may be poised to buy a second metro daily, the Palm Beach Post.

Cox Media Group sold the American-Statesman for $47.5 million — or as high as a 7× multiple on the Austin paper’s annual earnings, according to some observers. (Cox is privately held.) That’s a high price in the current mid-metro market. It came after a couple of rounds of bidding that featured a head-to-head battle between GateHouse and Hearst. Hearst had been the presumed favorite, given its already major presence in the state, owning the Houston Chronicle, San Antonio Express-News, and several other dailies. In fact, sources told me this week, Hearst had essentially matched GateHouse Media’s financial bid and was surprised to find itself on the short end of the deal.

That’s where The Palm Beach Post, 1,300 miles east, comes into play. Cox put both its Palm Beach and Austin papers on the market last fall, leading to a round of chain strategizing. Companies that already own nearby newspaper properties — Hearst, Gannett, and Tronc most prominent among them — plus a few others (including Digital First Media and GateHouse) kicked the tires and prepared to place offers. GateHouse, with 11 Florida dailies (notably in Jacksonville, Daytona Beach, and Gainesville, but with nothing south of Sarasota), seemed like a distant possibility for Palm Beach. Gannett, with sizable properties to the north, and Tronc with the Sun-Sentinel to the south seemed likelier to win the Post — and then do their own consolidating, which has become the primary strategy of the highly distressed newspaper business. While both companies bid for Palm Beach, Gannett has acknowledged internally that the Post price — at a similar earnings multiple as what the Austin paper is fetching — was too rich for its blood.

As GateHouse finished its final due diligence on Austin, sources tell me, Cox decided that selling both papers to a single buyer would become a key factor in the sales. Cox, like most newspaper chains, has highly centralized its technology platforms. Transitioning from one of these centralized systems to another — in this case, GateHouse’s — is a gnarly process, involving lots of hassle and some cost. Cox came to prefer one difficult transition rather than two. So it appears that GateHouse — again, paying a higher price than it’s used to — has the inside track. As expected, the companies making bids and Cox have all declined comment.

If GateHouse ends up the winner of these two significant dailies, the move will mark yet another quick evolution in the company’s recent life. Managed by Fortress Investments, but largely owned by a large group of institutional investors, GateHouse has quickly grown out of bankruptcy to own more than one of every 10 of the United States’ daily newspapers — currently 142 out of roughly 1,350. Once a company of smaller city dailies and weeklies, it’s moved up the food chain, rapidly buying properties in Columbus, Providence, and Worcester. The Austin American-Statesman would become its second-largest newspaper by circulation. (Austin is already home to GateHouse’s centralized design and production facility.) The Palm Beach Post would rank in the top 5.

Just last week, the company — formally traded as New Media Investment Group (NEWM) — reported full-year earnings. They were a tad better, by about two percentage points, than industry peers — but still down about 6 percent in revenues, on a same-store basis, year over year. That same-store basis — financially discounting all the newer properties that New Media CEO Mike Reed keeps buying — is an important consideration. Companies consolidating properties in a distressed industry can often tell a “growth” story by adding revenues from new properties. Further, New Media management is financially incentivized on asset growth — buying up more newspapers — as well as on other metrics. GateHouse’s driving strategy of cost control and cost elimination (in part through property consolidation) has improved profits. Inevitably, that means increasing layoffs of newsroom staff, well noted in today’s Texas Monthly piece on the sale.

The growth story of GateHouse is a one without precedent. As the company has rapidly bought up properties — often from increasingly eager-to-sell family owners — it’s struggled to become a real operating company. Now, in a short period of time, it’s built that Austin production facility, scaled up its UpCurve marketing services business, and grown GateHouse Live into an events strategy that puts on more than 350 events, across markets, a year. It also last year hired a new senior vice president of consumer marketing, Denise Robbins, from The New York Times, and mobile innovator Guy Tasaka, who now serves as general manager of Gatehouse Mobile. The still-gawky company, under the leadership of COO Kirk Davis, continues to fill out its leadership team, which remains underdeveloped in areas like product and analytics.

Ask executives at other news companies what they think GateHouse’s endgame will be and there’s usually a moment of silence. “Your guess is as good as mine,” one told me this morning. “They could invest in it, but that’s not going to keep its investors happy. Or, like Digital First Media, they could run it down to zero” — that milking strategy that is draining the life out of too much of a once-proud industry.

Photo of countless bats escaping from Austin’s Congress Street bridge by Lars Plougmann used under a Creative Commons license. (The Statesman’s offices are at the south end of the bridge.)

POSTED     March 6, 2018, 8:10 p.m.
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