In the GateHouse-Gannett mega-merger, Alden Global Capital plunders its newspapers’ reserves for another questionable investment

 

By Julie Reynolds

As private equity and hedge fund vultures circle over America’s remaining daily newspapers, it’s getting harder to determine Alden Global Capital’s game plan.

The New York vulture hedge fund, which owns one of the country’s largest newspaper chains, appears to keep bleeding money. This week, the flow comes from its purchase of 5.7 million shares in a rival news chain.

Securities and Exchange Commission filings show that Alden president Heath Freeman bought 9.4 percent of GateHouse newspapers’ parent company, New Media Investment Group Inc., on August 8. On that day, New Media stock closed at $8.81, which would put the value of Alden’s purchase at around $50 million.

Of course, the shares weren’t bought with Freeman’s own cash — rather, the money once belonged to Digital First Media newspapers.

It’s money that could have been used to invest in those newspapers as DFM rakes in double-digit profits.

Alden’s stock purchase came just after GateHouse and fellow news giant Gannett announced plans to merge into the mother of all mega-chains, with a reported 263 daily newspapers under the new umbrella.

Alden’s SEC report shows the shares were purchased by Strategic Investment Opportunities LLC, a shell company that Alden formed to divert cash from Digital First Media newspapers, according to Alden’s own court filings.

Alden has used Strategic Investment Opportunities to siphon hundreds of millions from its newspapers, buying up controlling interests in the dying Fred’s pharmacy chain (whose shares have lost more than 90 percent of their value since Alden purchased them) and the now-shuttered Payless ShoeSource chain.

As news spread of GateHouse’s intended merger with Gannett, both companies’ shares quickly tumbled, with shares of GateHouse’s parent dropping to $7.97 on Monday. The shares have lost nearly a quarter of their value since the start of last week.

This means the stock purchased by Alden lost around $5 million in value over just a few days.

This seemingly impulsive buy came as Digital First continues to lay off more employees, leaving one California newsroom with only one reporter and another with no photographer. Early this year, Alden even put one editor in the impossible position of overseeing more than 50 dailies and weeklies across California.

At the same time, the hedge fund was quietly extracting $47 million from its newspapers’ reserves to buy 5.5 million Gannett shares in a dramatic failed hostile takeover effort. Immediately after Alden’s proposed board slate (which included Freeman) lost a shareholder vote in May, Freeman dumped almost half of the Gannett shares in a quick sell-off.

Now he appears poised for a repeat. Freeman’s new SEC filing states that he bought the GateHouse shares in “the belief that the shares were undervalued” — the same refrain he invoked when attempting to take over Gannett.

Freeman wrote that he believes “the consummation of the merger may not be in the best interest of the issuer’s shareholders.”

He added that Alden reserves the right “to take certain actions with respect to the merger including, but not limited to, undertaking to vote against or campaign against the merger and to propose or suggest strategic alternatives other than the merger.”

Circling vultures

To be clear, Alden isn’t the only private equity firm ravaging local newspapers. GateHouse workers have endured their own severe cost-cutting under layers of shifting owners.

The chain is managed by another New York hedge fund, Fortress Investment Group, and its subsidiary Newcastle Investment Corp. Fortress, in turn, was bought in 2017 by the Japanese firm SoftBank. Fortress has kept a heavy hand in the new GateHouse-Gannett; the new company’s CEO Mike Reed is an employee of the hedge fund.

“It is a private equity company that will manage — through newspaper veteran executive Mike Reed — one-sixth of the U.S.’s daily newspapers for the next two years,” wrote media analysts Ken Doctor for Harvard’s Nieman Lab.

Reed has promised the new company can save up to $300 million by eliminating redundancies. But employees worry this simply means even more layoffs. “The only way they can get to $300 million is to fire 1,500 to 2,000 people,” an unnamed source told the New York Post.

And yet another hedge fund stands to profit from this mega-merger: Apollo Global Management, which provided a $1.792 billion loan for the deal.

Apollo and Alden executives know each other well, after Apollo almost bought Digital First from Alden in 2015. The loan comes with a hefty 11.5 percent interest rate, ensuring that for the next few years, GateHouse-Gannett will mainly be concerned with paying it back.

It’s worth remembering that this kind of debt-fueled merger mania contributed mightily to the local news crisis we struggle with today.

Still, Doctor writes, “for Gannett, it’s better than being captured by Freeman.”