Publishing in red ink

The factor that almost always separates one from the other is how a company viewed debt in recent years. Two of the newspaper industry's highest-profile financial disasters, Tribune Co. and the McClatchy Cos., both confront stupendous debt problems. The New York Times Co., which owns The Boston Globe, has its own debt problems.

But the smaller GateHouse Media Inc., measured pound for pound, rivals any of them when it comes to debt hangovers.

GateHouse was heavily dependent on credit from its earliest days as a small media company and grew much larger with the help of even more debt - obligations that threaten to overwhelm it today. The company is running up huge losses on paper, its stock has tanked, and no one is sure how it can pay back over $1 billion owed to investors.

"It does beg the question: What were they thinking?" says Tom Corbett, a Morningstar Investment Service analyst.

I'm not sure, either. GateHouse executives didn't call me back.

The GateHouse business is a collection of 91 dailies and hundreds of other small papers in 21 states. Gatehouse collects about 22 cents of every revenue dollar in Massachusetts, where it owns The Patriot Ledger of Quincy, The Enterprise of Brockton, and other papers.

GateHouse was organized by the private equity firm Fortress Investment Group, which still owns 42 percent of the company. It rolled up acquisitions of newspaper companies operating away from big cities. An important early acquisition: Community Newspapers Co., about 100 small papers owned by Boston Herald publisher Pat Purcell.

Along the way, GateHouse piled up some big secured loans. It owes $670 million on its largest term loan, $250 million on another, and $275 million more on a third.

Stock investors weren't shy, either. GateHouse went public three years ago in an offering of stock that sold for $18 per share.

How did the GateHouse plan ever fly with investors or creditors? Two ideas were popular when GateHouse executed its buying binge. For one, debt was cheap and available. For another, stalled industry revenues convinced many that consolidation was the way to squeeze growth out of newspapers.

But the GateHouse strategy was a recipe for disaster when revenues sunk. The company posted a loss of $673 million last year. Its shares now trade for 27 cents. The GateHouse plan to cope with all its debt depends on investors selling some back to the company at a discount over three years.

Analysts at Standard & Poor's note that cash generated by the business is very low in relation to the amount of debt owed and warn that something will have to give.

Here's the sad irony of the GateHouse story: The newspapers buried beneath the company's debts still make a cash profit on their own. They don't make a lot of money, and the cash they generate is shrinking fast. But they are still earners.

The $673 million GateHouse lost last year included noncash accounting charges of nearly $700 million and interest expenses approaching $90 million. The business itself generated about $100 million, roughly enough cash to cover the interest tab.

GateHouse posted a loss of $32 million in its most recent quarter. But the business produced $5.7 million in cash earnings before interest, less than a third of the amount it reported in the same quarter last year.

Now GateHouse vows to get even tougher on expenses at its operations, which can only diminish what's left of those newspaper franchises. How do you think that will turn out?

The GateHouse papers have serious problems of their own. That's true of every newspaper, including The Boston Globe. But the people working at and managing GateHouse's papers didn't make the decisions that put their parent in such a deep, deep hole.

Steven Syre can be reached at syre@globe.com.