So why did New Media Investment Group trade for $12.61 per Monday, down from nearly $20 per share last July?
Investors are starting to share the dim long-term assessment the United Media Guild offered back in 2014, after the this company rose from the ashes of GateHouse Media’s billion-dollar bankruptcy. Fortress Investment Group launched New Media Investment Group as a exercise certain to pay Wes Edens and Co. handsomely for several years while bleeding as much cash as possible from struggling newspaper operations.
That scheme has sped the decline of newspapers across the country, including the UMG-represented Peoria Journal Star, State Journal-Register, Rockford Register Star and Pekin Daily Times in Illinois.
Fortress doubled down on its GateHouse Media bet, raising capital to re-launch the company under the New Media Investment Group umbrella. While Fortress doesn’t actually own much New Media stock, it operates as its external manager and collects huge fees to do so.
(It has run this gambit successfully in other industries. That success is just one reason why Japan’s SoftBank opted to purchase Fortress for $3.3 billion.)
By committing to a $1 billion spending spree, New Media buys properties from bailing owners, then its GateHouse Media management team strips them down to maximize cash flow.
New Media uses this cash flow for two primary purposes: paying generous dividends to attract institutional investors and to fund more acquisitions. By getting bigger and bigger, New Media pays Fortress greater and greater managerial fees.
The flurry of acquisitions (and the lucrative resale of the Las Vegas Review Journal under dubious circumstances) allowed the company to build revenues and give the appearance of growth — even as revenues at individual properties declined precipitously.
To distract investors from plunging print advertising revenues, New Media hyped the growth of Propel Marketing and digital advertising. Propel does deliver growth, but not nearly enough offset the print decline. Digital advertising growth stalled as the more consumer traffic shifted to harder-to-monetize smart phone applications. The GateHouse Live events business offers growth, but at a very small scale.
Still, New Media CEO Michael Reed insisted organic growth would come some day. That promise, along was hefty dividends, was supposed to drive up the price of its stock.
And here is the harsh reality of New Media Investment Group:
By gutting the news-gathering operations at its properties, the company has greatly diminished its core product. While New Media touts its properties as a “trusted news source” with long community standing and limited competition, readers and advertisers recognize the precipitous decline in quality.
With paid circulation plunging across the chain, New Media’s strategy is to charge more and more for less and less real content. Circulation revenue accounts for more than one-third of the company’s revenue. When will that bubble finally burst?
Reed keeps promising organic growth, but then keeps pushing the timetable further down the road. Many experts on media stock began souring on New Media last year, shifting their “buy” tag to “neutral” or even a “sell” recommendation.
At a time when all newspaper companies must work with its employees to promote their products and the craft of journalism — which is under assault from every angle — New Media has taken an hard-line stance against members of The NewsGuild. This has led to:
- Increased worker mobilization within GateHouse-managed newspapers.
- Joint union mobilization across various newspapers in the chain, such as the recent joint action with Digital First Media workers.
- Unionization of previously non-represented properties — including two in Florida, which was previously unheard of.
- Several successful unfair labor practice charges with the National Labor Relations Board, resulting in pricey legal battles.
- Guild outreach to readers and advertisers through well-publicized community campaigns in key markets, encouraging consumers to demand more from their newspaper’s owner.
- Guild outreach to investors and analysts as part of its expanding corporate campaign to highlight the street-level impact of managerial strategy.
All that has put even more stress on New Media’s business, with no end in sight.
The story at New Media (NYSE:NEWM) is one of the strangers in the markets. First, it’s a roll-up of local newspapers, a seemingly odd target, given the obviously secular decline in the space. NEWM pays a double-digit dividend, for reasons that aren’t entirely clear: after distributing nearly $100 million over seven quarters, while talking up extensive acquisition opportunities in the space, the company executed a $120 million stock offering in November. This came at the same time NEWM management was talking up its undervalued stock – even citing a $25 price target . . . .
And, again, it’s a rollup of local newspapers and using a strategy that its predecessor GateHouse Media rode straight into Chapter 11. The irony is that an investor unfamiliar with the NEWM story might assume that it was essentially a ‘cigar butt’ type of play: local newspapers could add value if they’re a) acquired cheap enough and b) can contribute enough cash flow (either through existing business and/or synergies/cost cuts) to repay the acquisition cost in a matter of years. But New Media’s version of the story is that organic revenue trends will improve, as digital revenue growth offsets ever-shrinking legacy print business.
I’m highly skeptical on that point, and Q1 results last month support that skepticism.
The United Media Guild has been skeptical for years. Now Wall Street is finally catching on.