By: Mark Fitzgerald
Back when GateHouse Media Inc. was shaping itself up for its October 2006 initial public offering (IPO), it faced plenty of skeptics on Wall Street who look pretty prescient now that its share price teeters at $1 or less, and the New York Stock Exchange has stopped floor trading in the stock.
Even then — before GateHouse went on to double its debt load in a single year — there were observers who thought the community newspaper publisher was too leveraged, and wouldn’t be able to generate the free cashflow to fund its proposed very high dividends.
A couple of the critics of the IPO made the interesting argument at the time that the investors who were so hot for GateHouse weren’t really buying a newspaper company — but betting on the Midas touch of its owner, the private-equity and hedge fund firm Fortress Investment Group.
Going into the GateHouse IPO, investors knew, Fortress had delivered triple-digit annual returns taking public such companies as senior citizen homes operator Brookdale Senior Living and jet aircraft leaser Aircastle.
“Fortress has a nice track record and they’ve put in place a solid management team,” trader and researcher Bill Simpson, who runs the Tradingipos.com Web site, told E&P at the time. “It is a difficult sector, though, and I think due to Fortress involvement investors are overlooking the risks in a strategy of rolling up slow growth businesses via laying on debt.”
Another skeptic, Francis Gaskin, jeered in his influential IPO Desktop site that investors were just wowed by Fortress. “The story is that Fortress has basically put its prestige on the line for that dividend,” Gaskins said at the time. “They had to do that — because (the IPO) is not believable from the financials.”
Eighteen months later, the skeptics about GateHouse appear to be in the majority. Its share price has collapsed as analysts wave investors off the stock — with one analyst, Tom Corbett of Morningstar, even writing last week that its fair value price is zero.
GateHouse stock, of course, is punished for things it has in common with other publicly traded companies such as Journal Register or The McClatchy Co.: Too much debt taken on to expand too much in a sector where cashflow is stagnant, and even declining for cyclical and, as they say, secular reasons.
Could it be that now Fortress — by far the biggest holder of GateHouse with a nearly 42% stake — has turned into an additional drag on GateHouse stock?
A few months after GateHouse went public, Fortress itself became the first U.S.-based private-equity or hedge fund to go public. Investor enthusiasm was even greater than for GateHouse. Priced initially at $18.50 a share, Fortress soared to as much as $37 in its first day of trading.
Just as it has GateHouse, though, Wall Street has fallen out of love with Fortress, and with the handful of other private-equity funds that followed it in going public. Fortress (NYSE: FIG) shares closed at $10.78 Monday.
That was the same day The Wall Street Journal noted in a story by Peter Lattman that its $560 million bet last spring on triple-A-rated residential mortgage-backed securities has gone south, with its Fortress Mortgage Opportunities Fund down about 30%. The Journal described that as “yet the latest comedown for Fortress.”
In a sort of vicious circle, it seems at least some investors are abandoning GateHouse out of disenchantment with Fortress — and GateHouse’s well-publicized stock woes are souring some on Fortress.
GateHouse (NYSE: GHS) closed Monday at $1 a share, up 3 cents, or 3.09%.