An unlikely IPO
Investing in public newspaper companies feels like an exercise in pain management. All of the stocks are way down, some near 10-year lows, and the latest quarterly news, out last week, confirmed a widespread advertising slump continues throughout the industry.
Everyone knows about the daunting challenge facing newspapers as they try to adapt to the Internet age. No one really knows how or when it's going to shake out.
So this would seem like an odd time for an initial public offering from a newspaper company. But GateHouse Media Inc. hopes to raise more than $200 million when its offering is scheduled to be priced today. It's either the most counter-intuitive IPO imaginable, or a case of dreadfully bad timing.
GateHouse Media is a collection of 75 suburban dailies, 231 weekly community newspapers, and 117 shoppers owned by the private-equity firm Fortress Investment Group. A big part of the GateHouse portfolio -- four dailies and 93 weeklies and other papers -- was acquired this year from Community Newspapers Co., which was owned by Boston Herald publisher Pat Purcell. Most of those papers ring Boston from the suburbs.
"GateHouse is choosing probably not a very propitious time to go to the market," says newspaper industry analyst John Morton. "We'll see, but generally when prices have gone down as much as they have for the publicly traded companies, it doesn't suggest it's going to be a good time to go public."
Among the five largest public newspaper stocks, all but one has lost ground this year, while the Standard & Poor's 500 index has climbed more than 10 percent. Tribune Co. shares have gained 9.7 percent, but only because the company has put itself up for sale. All five, including The New York Times Co., parent of the Globe, reported lower third-quarter advertising revenue last week.
The GateHouse offering isn't exactly cheap, either. Based on valuations relative to cash flow, GateHouse shares priced at their preoffering estimate of about $17 would be a bit more expensive than McClatchy Co. stock and much richer than Gannett Co. shares, says analyst Melanie Hase of Renaissance Capital Corp. , a Greenwich, Conn., firm that follows IPOs.
The GateHouse stock pitch comes with four elements. Most importantly, the company hammers away at its "hyper-local" newspaper strategy, which it claims is better insulated from Internet advertising threats. There may be something to that today, but no publisher is immune to the Internet threat. Meanwhile, Morton notes, the stocks of public companies that own smaller community newspapers have stumbled, just like those of the industry leaders. What happened to their insulation?
Another element of the GateHouse pitch: The ongoing integration of Community Newspapers into the company's portfolio will yield greater operating profits. That's probably true, but a limited advantage.
Then there is the big sweetener, a cash dividend initially set to pay 32 cents a quarter and yield a whopping 7.5 percent annually, based on the stock's estimated IPO price. GateHouse warns the dividend rate may not hold up after the company goes public, but it got people talking. "The 7.5 percent yield is a very good tool to get investors attracted to this deal," Hase says. "But they have to perform almost to perfection to pay that dividend. It seems like a lot of money."
Finally, consider the impressive record Fortress has enjoyed taking other companies public. They include Brookdale Senior Living Inc. (up 157 percent since an IPO 11 months ago), Global Signal Inc. (up 200 percent since 2004 ), and Newcastle Investment Corp. (up 120 percent since 2002 ). All those companies are in real estate. But any stock that comes with a 7.5 percent yield in today's market is paying investors to take a real risk. That includes GateHouse Media shares.
Steven Syre is a Globe columnist. He can be reached at syre@globe.com. 
