By: Mark Fitzgerald One-time industry supernova GateHouse Media Inc. broke apart its business model Friday, suspending its rich dividend indefinitely, taking emergency action to stay within its loan covenants, and reporting a $429.7 million second-quarter loss that includes a big goodwill impairment charge to reflect its cratering stock price and falling cash flow.
GateHouse went public in the fall of 2006 with a pitch to Wall Street of ensuring high stock prices by aggressively acquiring small-town monopoly newspapers and using the free cash flow to pay out dividends unusually high for a newspaper company. Friday, the Fairport, N.Y.-based publisher of 97 dailies essentially acknowledged that the $1.2 billion in debt taken on to finance its growth drive -- combined with the newspaper industry slump -- had cut deeply into the company's value.
The $443.1 million non-cash goodwill impairment charge GateHouse reported reflected in part a stock price that has collapsed from a high of $22 a share to just 69 cents at the close of trading Thursday.
"This impairment is more a reflection of the company's stock price and a reconciliation of market capitalization to book value," CEO Michael E. Reed said in a statement. Based on Thursday's stock price, GateHouse has a market cap of $40.2 million. Its stock could be delisted from the New York Stock Exchange if it does not consistently trade above $1.05 in the coming weeks.
GateHouse reported its cash flow has declined, and its same-property revenues were down.
"Levered" free cash flow for the quarter fell to $11.5 million compared from $17.4 million for the same quarter in 2007. GateHouse uses a non-GAAP measure called "as adjusted EBITDA (earnings before interest, taxes, depreciation and amortization)," which excludes depreciation, amortization, and other non-cash items. As adjusted EBITDA fell 8.2% to $38.0 million -- but on a same-property basis, as adjusted EBITDA was down 16%.
Total revenue was up 16.5% to $184.1 reflecting newly acquired newspaper, but on a same-property basis, revenue fell 4.7%, GateHouse said.
GateHouse's operating loss for the quarter excluding the goodwill charge was $13.4, compared to $18.5 million a year ago.
GateHouse reported its ad revenue fell 3.2% on a same-property basis, which it said outperformed newspaper peers.
Classified fell 16.6%, less than the declines the publishing companies of big city dailies have reported for the quarter.
GateHouse said its same-property online revenue jumped 34.8%.
Circulation revenues in the quarter increased by 1.1%, driven by price increases partially offset by what it said were "small volume declines" in sales.
In addition to suspending the dividend, GateHouse said one of its subsidiaries is issuing $11.5 million of non-voting cumulative preferred stock to a private equity fund managed by an affiliate of Fortress Investment Group, the struggling private equity group that is GateHouse's largest shareholder.
"The proceeds will be used to ensure the company is in compliance with its credit agreement," GateHouse said in statement.
"Given the challenging environment we are using free cash flow to reduce leverage and maintain additional liquidity," GateHouse CEO Reed said in a statement. "These initiatives will also allow us to pay down our revolving credit facility to zero over the next three months. When the revolving credit facility is at zero, we have no leverage covenant tests under our credit facility. Our facility does not mature until 2014, which provides us with significant time to strengthen our balance sheet."
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