More doubts raised about New Media/GateHouse stock

After GateHouse Media was reborn as part of the larger New Media Investment Group, analysts were bullish on the stock’s potential.

The company has plowed forth on a buying spree, becoming one of the few big players left in the newspaper industry. On his 2015 fourth quarter earnings call with analysts, New Media CEO Michael Reed said the company could spend up another $360 million on acquisitions in 2016. The purchases keep coming.

Even after giving a glowing 2016 first quarter earning report and paying another healthy dividend, though, New Media stock dipped back below to $16 per share in early May — well below its 52-week high of $24.32 and about one-third of the long-term price some analysts initially predicted the stock should reach.

In a note to investors, Citigroup Inc. downgraded New Media stock from “buy” rating to neutral and lowered its target price for the stock to $17.

What’s with the stock? In an earlier piece for, Rick Edmonds observed:

Some commentators have doubted whether New Media’s strategy will work as well at bigger papers it bought in Columbus and Providence as it has with earlier additions of smaller papers.

In the conference call with analysts, Reed argued that the market undervalues New Media. The newspaper sector, he said, is “out-of-favor and fragmented,” and that leads to New Media being “misunderstood.”

But is it really misunderstood? Or is the market wary of a newspaper company that buys and plunders properties, seeking maximum quarter-to-quarter cash flow while risking accelerated erosion of readership and advertising revenues? At some point, doesn’t the company have to grow the bottom line?

New Media puffed up its fourth quarter numbers with a $54 million cash infusion from flipping the Las Vegas Review-Journal to casino magnate Sheldon Adelson, who bought the newspaper to pursue a personal agenda.

That was a nice windfall for the company, but raised serious questions about its commitment to credible journalism. First New Media/GateHouse tried to get reporters at the Review-Journal to do Adelson’s bidding by investigating Las Vegas judges. Then company executive David Arkin tried to get journalists at its Sarasota newspaper to investigate the judges.

New Media/GateHouse has since scaled back its management agreement in Las Vegas and backed away from the mess, but not before its egregious ethical lapses drew extensive national coverage in both the industry and the mainstream media. The controversy triggered rumblings of an unhealthy rift between Reed and Kirk Davis, the New Media COO and GateHouse CEO.

It’s no wonder the company felt compelled to assemble its editors for an April meeting in Chicago.

Reed touted Sarasota’s Pulitzer Prize-winning work in his 2016 first quarter earnings call with analysts, but he made no mention of the company’s controversial attempt to deploy those same reporters to do Adelson’s bidding.

Oh, and Davis had to move quickly to squelch ethical concerns about the company’s bid for a marketing deal with the city of Quincy, Massachusetts — home of GateHouse’s Patriot Ledger newspaper.

Of course, New Media/GateHouse management is creating even greater concerns of interest to investors. Let’s run down the list:

Core product deterioration. New Media/GateHouse has cut newsroom operations to a fraction of their former size. Even after emerging from bankruptcy flush with cash, it continued running off veteran reporters, photographers and

Providence Journal protest in face the of GateHouse cuts.
Providence Journal protest in face the of GateHouse cuts.

editors and hiring entry level replacements — often at less than a living wage. The company even churns publishers at key properties like the State Journal-Register in Springfield. The constant cutting and churning keeps diminishing the “strong and trusted local brands” the company touts to investors. Outsourcing copy editing functions to its Austin design center has further diminished content quality, since ever-changing workforce there is far removed from the communities New Media/GateHouse newspapers serve. In many cases editors have little knowledge of the people, places and issues in the stories they process. As a result, more obvious errors end up in print.

Print advertising vulnerability. New Media/GateHouse is not the only newspaper company fretting about the future of print advertising (22.1 percent of New Media revenue in 2015) and “preprint” advertising (nearly 14 percent). The company reported double-digit declines in both categories in its fourth quarter statement, which was typical in the industry. But the company’s increasing desperation to slow the decline has led to heavy management and salesperson churn. The implementation of new non-compete clauses has prompted experienced salespersons with strong advertiser relationships to leave the company rather than limit their future employment opportunities.

Classified advertising vulnerability. The company has stemmed decline in this area by inflating the cost of obituaries to families through multiple means, including blowing up the font size of the obits. This is still another short-term fix with potential long-term ramifications.

Digital advertising/Propel “growth levers.” While the company is making some digital strides, many of the New Media/GateHouse markets are too small to value Propel and the company’s bigger markets feature heavy competition from similar products. Propel remains an insignificant revenue source (2.6 percent) for the company. Desperate to grow digital advertising and Propel, the company’s ever-changing management team devises aggressive sales plans that often overreach — causing long-standing local print advertisers to spend nothing instead of more.

Circulation revenue vulnerability. Circulation produced 31.6 percent of the New Media revenue. Its percentage of total company revenue keeps growing. While circulation is plummeting at many properties, the company offset that decline by raising subscription and newsstand prices and making subscribers pay extra for “premium sections” that are essentially advertorial fluff. That, in turn, causes potential for further readership erosion. How long can New Media prop up this category?

Union-directed subscriber and advertiser boycotts.  Even while spiraling into bankruptcy in its earlier incarnation, GateHouse Media maintained reasonable relationships with its unions. After its rebirth as the cash-flush New Media Investment Group, the company has established a more strident tone toward its employees, many of whom have endured wage freezes of eight or more years.  The company is steadfastly refusing to offer raises during negotiations with various unions. In New Media’s 2015 Annual Report, the company notes that it has 35 collective bargaining agreements with unions at various properties.  Most of its unionized employees work under CBAs that expire in 2017. “We believe that relations with our employees are generally good and we have had no work

Not-so-happy employees in Springfield.
Not-so-happy employees in Springfield.

stoppages at any of our publications,” the Annual Report noted. On the first point, morale is actually terrible and turnover is high at many company properties, due to eternal wage freezes for long-time employees, low pay for new employees, reduced staffing and various administrative snafus related to the company’s rapid expansion.

As for the absence of worker strikes, unions prefer to establish an economic value for labor peace through public pressure and orchestrated boycotts. Convincing local businesses not to advertise in a newspaper is not difficult, since many have been moving away from print anyway. Convincing readers to quit subscribing isn’t hard, either, giving the soaring subscription and newsstand prices and the glaring content reduction. What is hard is regaining advertisers and readers after they leave. At the State Journal-Register in Springfield, Ill., for instance, the loss of just one key advertiser would cost the company far more money than settling with United Media Guild on a fair contract for its members. UMG business representative Shannon Duffy has spoken to many of the paper’s top advertisers, some on multiple occasions. Springfield is well aware of the UMG’s years-long fight for a first contract, thanks to a radio commercial blitz, outreach to community and labor leaders, public demonstrations and direct meetings with some of the SJ-R’s biggest advertisers. This has become a model programs for other newspapers to follow. Public campaigns in markets like Providence, Rockford and Erie could provide more examples of how New Media/GateHouse risks serious long-term damage while trying to vacuum every last nickle and dime from its properties on a quarter-to-quarter basis. Oddly, such potential economic damage was not on the laundry list of “Risk Factors” disclosed to investors in the 2015 Annual Report.

Union-directed corporate campaign. John Levin, chairman and chief executive of Levin Capital Strategies L.P., has provided a blueprint for future shareholder motions at New Media. He called for more independent directors for the companies spun out of Newcastle Investment Corp. to reduce the obvious conflicts of interest. The external management structure of these spin-offs reward the money guys backing the enterprise, Wes Edens and the Fortress Investment Group LLC, while putting shareholders in some peril. Reed is the CEO of New Media, but he is paid by Fortress. Levin notes that Fortress gets paid to build size, not to necessarily create better performance. As Levin noted about another Fortress property, New Senior Investment Group, perhaps a buyer will come along and save the company for the long haul. The same could occur for New Media. Shareholders should either hope that happens or properly time their exit before these executives crash the stock, as they did with GateHouse Media. Either way Fortress would come out fine, thanks to the hefty management fees it collects along the way.