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Boston Capital

On guard at Gatehouse

Email|Print| Text size + By Steven Syre
Globe Columnist / November 15, 2007

A financial update: The newspaper business still stinks.

That's not news to anyone who follows the public stocks of big newspaper companies, including this paper's corporate parent, The New York Times Co. Now one company that has spent most of the past year swimming against that powerful tide finds itself losing favor, too.

Gatehouse Media Inc. went public late last year, when investor sentiment toward newspaper stocks was already grim, and got a surprisingly warm reception. Gatehouse sold shares at $18 apiece, which gave the company a handsome valuation, and then managed to sell another $300 million worth of stock at a price of $18.45 just four months ago.

But Gatehouse stock has been falling hard since, and the company's latest quarterly financial report, issued after the market closed on Tuesday, didn't help. Gatehouse shares sank $1.47, or 12.5 percent, to $10.28 yesterday, their lowest closing price since their intitial offering.

Gatehouse is a giant collection of small and very small publications spread across the map -475 properties in 19 states by its own account. A large and important part of that portfolio is located in Massachusetts, acquired in 2005 from Pat Purcell's Community Newspapers Co.

Gatehouse executives tell investors their company can withstand forces buffeting the rest of the newspaper industry (read: Internet) and thrive thanks to a "hyper-local" strategy employed by all their small hometown papers. The idea: Less competition and better protection against elements of the Web that have been sapping newspaper revenue, especially sites that turn cash-cow classified advertising into free services.

But the hyperlocal story isn't holding up as well as some investors hoped. Gatehouse's third-quarter revenue declined about 1.7 percent on a "same-store" basis. Advertising revenue was a little worse, down 3.3 percent. That performance was better than the overall industry, but hyper-local didn't provide the kind of insurance some people expected.

"Our thesis that a focus on small, hyperlocal markets would serve as a counterweight to cyclical and secular pressures negatively impacting newspaper industry revenue performance has proven only partially correct," wrote Goldman Sachs analyst Peter Appert when he downgraded Gatehouse shares from "buy" to "neutral" yesterday. He cut his price target from $16 to $10 per share.

Another analyst, John Janedis of Wachovia Capital Markets, cut his Gatehouse forecast but still likes the hyperlocal business model. "It's really hard to argue those papers and groups are not outperforming the industry today," he said.

The weakest parts of Gatehouse's business were some of the same sources of revenue under long-term pressure at all newspapers, namely real estate and auto classifieds.

But Gatehouse chief executive Michael Reed didn't see any big-picture shift in his company's business. "I believe the current classified weakness is cyclical, not secular, and that is a function of the local economies," Reed said in a conference call with investors yesterday.

The local economy that hurt Gatehouse most was our very own. Reed said $2.8 million of the company's $3 million total revenue decline was tied to Massachusetts.

Gatehouse borrows heavily to buy newspapers and spends almost all its profit paying out a big dividend. As the stock has fallen, the yield on the dividend now stands at 15.6 percent. That's a sign investors fear declining business may force the company to cut its payout.

A hyperlocal strategy has given Gatehouse a financial advantage over other newspaper companies so far. But the Internet will be a daunting challenge for all publishing companies in the future. What looks like a cyclical advertising problem at Gatehouse today will become a secular headache before very long.

BOSTON CAPITAL BLOG Steven Syre is a Globe columnist. Read his daily blog at boston.com/business. He can be reached at syre@globe.com.

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