Real Estate Riches Flow Into Newspapers -- As Moguls Buy Them

By: Subscribers, shareholders and advertisers may be leaving newspapers in droves but real estate moguls, of all people, are sinking part of their fortunes into the business.

For better or worse, that gives outside magnates a growing role in newspapers at a time of dramatic change for an industry long dominated by traditional media ownership.

The new players aren't all about real estate but have it at the core of their fortunes:

-- Fortress Investment Group, which has billions in real estate and private equity, bought Liberty Group Publishing in 2005 and took it public last October as GateHouse Media Inc., controlling hundreds of small-town papers.

-- Bruce Toll, whose Toll Brothers Inc. is the nation's largest luxury homebuilder, joined a $515 million deal to acquire The Philadelphia Inquirer and Philadelphia Daily News from The McClatchy Co. last year and became chairman of parent Philadelphia Media Holdings.

-- Billionaire investor Sam Zell secured a deal this month to take Tribune Co., the nation's second-largest newspaper publisher, private in an $8.2 billion deal. The Grave Dancer, as he is known for his ability to snatch up distressed assets, said he plans to be actively involved in the business as chairman.

Also anxious to get in on the newspaper game, among others, is billionaire developer Eli Broad, who bid unsuccessfully for Tribune with supermarket magnate Ron Burkle. All the outside interest comes at a time when big media companies passed on Tribune.

What changes the wealthy bargain-hunters might bring to the business remain mostly uncertain.

Representatives of Fortress and Toll declined to return phone calls seeking interviews; Zell said he's still learning about his new company, whose holdings include 11 newspapers, 23 TV stations and Internet businesses.

Industry experts say it's clear, however, that the supposedly down-and-out business has plenty to attract the financiers besides cheap sales tags.

"When you think about it, there are a lot of reasons why real estate moguls would be interested in newspapers," said Morningstar analyst Arthur Oduma.

Strong and predictable cash flows from media properties are a key lure, mirroring those in real estate holdings.

Another draw is the acquired real estate itself, even though Zell's stated intent isn't to break up Tribune. The Chicago-based media conglomerate owns or leases 2.7 million square feet of office and production space in 289 U.S. locations alone with more than 1,000 acres of land, according to its annual report.

Finance experts also say the ability to load companies like Tribune with debt and take them private minimizes the investment risk and makes the firms easier to run once they're away from Wall Street's harsh quarterly glare. The reliable cash flows make them better able to withstand the high debt loads.

"The distress is in the stock price, not necessarily in the business," Oduma said.

Zell is gaining effective control of Tribune in a complex deal that calls for him to inject only $315 million of his own money. By converting it to employee stock ownership, the company also will no longer be subject to corporate income taxes that now total hundreds of millions of dollars annually, making it easier to pay off $5 billion in new debt.

During a recent discussion with Stanford Law School students, Zell scoffed at the notion that newspapers are not a good business.

"A lot of people didn't think the railcar business was a good investment," he responded, according to the Los Angeles Times. "I made a quarter-billion dollars. A lot of people didn't think container leasing was a good investment. I made a half-billion. Should I go on?"

Coming from real estate to newspapering poses challenges but also holds potential advantages for the outsider tycoons.

Lou Ureneck, director of Boston University's business and economics journalism program, said managing costs will be a major challenge for Zell since real estate money is tied up in bricks and mortar whereas in the media business it's in people and salaries.

On the other hand, he and other experts said, real estate entrepreneurs have a proven knack for deal-making, asset development and intricate financial maneuvers that can benefit their new businesses.

"Zell seems to have employed that particular genius, when you consider how little money he's had to put up front in order to gain control of a company worth billions," Ureneck said. "That demonstrates financial creativity and acumen at a high level."

Philadelphia Media Holdings is still new at running the Philadelphia papers. But analyst Peter Conti sees some of its early changes as signaling the new owners won't be conventional media stewards, such as dropping out of the CareerBuilder online classified advertising venture and signing a partnership deal with rival Monster Worldwide Inc.

Likewise, the new media owners may be quicker to innovate with Internet possibilities than those "shackled" by conventional thinking, said Conti, of Portsmouth, Va.-based media research firm Borrell Associates Inc.

"Newspaper companies and publishers have pretty much been traded among each other ... for the past century or two," he said. "Now we have people coming in that are not bound to this baggage and they can make decisions that are based on the marketplace, freed of a newspaper-concentric viewpoint."

GateHouse, too, has shown contrarian tendencies under its new-to-media ownership, according to Rick Edmonds, a newspaper industry analyst at the Poynter Institute in St. Petersburg, Fla. Under Fortress, it has bucked recent custom by going from private to public and acquiring one newspaper after another across the country _ mostly in small towns where local papers have proven much more profitable than in cities.

Those successes notwithstanding, the media experts caution that the newspaper industry likely faces more turbulent years ahead, perhaps making the well-heeled real estate investors well-suited owners because they can afford to wait out the bottom of the cycle.

"They may have to be patient, accepting there's going to be a period of transition and finding your way when the way is not really obvious," Edmonds said.