Analyst: GateHouse Stock Could Be ‘Worthless’

By: Mark Fitzgerald

As GateHouse Media Inc. stock sank more than 20% in early trading Tuesday — briefly touching $1 a share — Morningstar released a trenchant report declaring shares of the acquisitive community newspaper publisher “could be worthless.”

“Because of the company’s exposure to a challenging advertising environment, a debt-heavy balance sheet, and declining cash flows, we think the equity shares could be worthless,” stock analyst Tom Corbett wrote.

Morningstar reduced its fair value estimate for GateHouse shares to zero from $3 in its report in May.

Morningstar also said GateHouse is close to violating one or more of the covenants on its huge deb. “Should that happen, its debt could become due immediately, resulting in a possible liquidation scenario,” Corbett wrote.

At about noon EDT, GateHouse (NYSE: GHS) shares were trading at $1.05, off 31 cents, or 22.79%, from its open. The price was a new 52-week low for the Fairport, N.Y.-based publisher of 98 dailies and 290 weeklies. Shares had traded as high as $19 in the past year.

With the collapse of its stock price, GateHouse’s market capitalization has sunk to $61 million.

In his report, Morningstar analyst Corbett said GateHouse’s concentration in small markets with long-established monopoly papers has not insulated it from a flawed strategy of taking on big debt for acquisitions, and paying out large amounts of free cash flow for higher-than-average dividends.

“Our skepticism about the sustainability of GateHouse’s generous $1.60 per share dividend in 2007 was borne out when the company cut it in half in March 2008,” Corbett wrote. “We think another dividend cut is likely. Even if GateHouse completely eliminated its dividend, given the combination of its high debt load and our unfavorable outlook for the industry, we think this would provide only short-term relief for equity holders.”

In the first quarter of this year, GateHouse’s quarterly dividend payment was four times greater than its free cash flow, the report said.

A GateHouse investor relations executive did not immediately return a message seeking comment on the report.

Morningstar noted that in 2007, GateHouse doubled its debt to more than $1.2 billion to fund the acquisition of about 70 papers and a phone directory publisher. “They made GateHouse bigger, but we don’t think they made it better,” the report said.

In the first quarter of the year, Morningstar calculated, GateHouse EBITDA (earnings before interest, taxes, depreciation, and amortization) covered its interest expense just 0.8 times.

In the same quarter, GateHouse’s quarterly dividend payment was four times greater than its free cash flow, the report said.

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