Despite debt, chain seeks more papers

The company that recently paid $410 million for a massive lineup of suburban newspapers ringing Boston is shopping for more publications around the country while also trying to pay down the large debt it amassed to do the deal.

GateHouse Media Inc. -- which two weeks ago filed plans for a public stock offering -- said it sees big potential in small papers. Of 380 daily newspaper owners in the United States, more than 93 percent own fewer than 10 papers each, according to research cited by the company in a disclosure statement required as part of its stock offering. To GateHouse, that means there are plenty of potential sellers.

``We believe this fragmentation provides significant consolidation opportunities," the company said in its statement.

To fuel its strategy, GateHouse has borrowed a lot of money. ``They've been piling up debt in order to grow," said Lou Ureneck , director of Boston University's business and economics journalism program. ``The danger from a public point of view is that the debt burden gets so high that the company begins to drastically reduce its expenditures on the coverage of news."

GateHouse, with headquarters in Fairport, N.Y., was purchased last year by a New York hedge fund and venture capital firm, Fortress Investment Group LLC . It was known then as Liberty Group Publishing, but its name was changed in May to GateHouse Media. Fortress also invests in assisted-living centers, cellphone towers, aircraft leasing, and large real estate projects.

GateHouse says it wants to grow in regions where it can build clusters of ``hyper-local" publications that have monopolies on news in small cities and towns. It says it can make the papers perform better financially by centralizing operations, including advertising sales and production, and through group purchases of insurance, newsprint, and other products and services. It also is attempting to build a network of local websites that would allow it to leverage its reach into suburban homes.

The company made an aggressive move into the Boston market this year by paying $230 million for Community Newspapers Co. , the chain of four dailies and 93 weeklies and other newspapers, owned by Patrick J. Purcell , publisher of the Boston Herald. GateHouse also bought Enterprise NewsMedia Holding LLC , which publishes the Patriot Ledger of Quincy and the Enterprise of Brockton, as well as MPG Newspapers' 23 weeklies and other newspapers south of Boston, for $180 million, according to figures disclosed in the offering statement. The Enterprise NewsMedia acquisition also included the southofboston.com website, and its offshoot, wickedlocal.com .

Already, it is cutting costs at the properties south of Boston. Community Newspapers and MPG had competing newspapers in such communities as Kingston, Marshfield, Pembroke, and Plymouth. Last week GateHouse said it would combine some operations of the two branches, but did not indicate whether any of the newly acquired weeklies would close .

GateHouse declined to comment but said in a statement its goal would include ``minimizing potential staff reductions."

Last week, GateHouse executives held meetings with Community Newspapers and MPG employees to discuss the changes, which in addition to an unspecified number of layoffs will also include closing MPG's headquarters off Route 3 in Plymouth, and converting tabloid newspapers to a broadsheet format.

With the high-profile Boston deal, GateHouse's national operation now spans 75 daily newspapers, 231 weeklies, 117 local shoppers, and 230 websites in 17 states. The company, if it had been merged in 2005, would have posted $384 million in total revenues, according to its filing.

But its debt is high. If the revenues of GateHouse, Community Newspapers, and Enterprise NewsMedia had been combined last year, operating income on advertising, circulation, online sales, and other profitable activities would have been $38 million. But those gains would have been wiped out by $49 million in interest payments on debt, according to its disclosures. With the debt payments and other expenses, the company's 2005 loss would have been $21 million.

The company said in its public offering statement that up to $200 million of the proceeds from the public offering will be used to pay off $152 million in debt it incurred to buy the Boston area properties.

GateHouse's public offering strategy is producing some skepticism. On average, newspaper stocks sank 20 percent last year, and have dropped another 15 percent so far this year, said John Morton , an analyst at Morton Research in Silver Spring, Md.

GateHouse's investors will likely be looking to cash out and sell their newspaper business within three to five years, said media consultant Peter Krasilovsky , principal of Krasilovsky Consulting of Carlsbad, Calif.

``Directories, and community content, and retail shoppers, are all converging together," he said. ``These guys think they can go in, buy undervalued properties, do some investment, and really prepare for the next generation of local business marketing."

Christopher Rowland can be reached at crowland@globe.com.