Mike Reed Sets Goals for New Gannett

You have a problem with a deal that Gannett's owners made WILLINGLY -- knowing fully what they were agreeing to and who they were selling to and that New Media was an affiliate of Fortress, etc. -- in which Gannett shareholders got paid an 18 percent premium in return for selling their company?

If you were a Gannett shareholder and you had a problem with New Media's management (for example, the arrangement with Fortress), there was nothing forcing you to own equity in the company. You could have taken your cash, sold the shares you got and walked away with a nice PROFIT from where your stock was trading pre merger. ... and invested in something else that you think is a better opportunity. The horror!

If you had not been a New Media shareholder pre merger, there has been absolutely nothing forcing you to buy shares of the company. That's exactly the point. Scour the 10-K and if you see what you think is a pile of dog crap that isn't justified by the stock's valuation, don't buy it. But telling me how objectionable it is to you or how immoral you find it? OK.

 

It took me a while to figure out what you are talking about in your post.

We were discussing Gannett, and you kept objecting to a deal the owners of the company made, even though it was a freely-made sale in which they got paid a premium, and you were giving me these vague moral objections to it.

Now. ... you are on something different. i.e. -- the Gatehouse bankruptcy? I really had trouble following it, because we were talking about Gannett, and then when you hit me with this, you began by saying, "Fortress had controlled New Media before it went into Chapter 11," and I was trying to figure out who went into Chapter 11, and how it relates to what we've been talking about. Because New Media never went into bankruptcy.

Once I figured it out, just to correct you. ... Gatehouse went bust, not New Media. New Media was borne from Gatehouse -- it was the holding company that was formed to take Gatehouse out of bankruptcy. But you didn't mention Gatehouse or tell me we were talking about its bankruptcy.

Then, you started talking about a third group of shareholders, and since we had been talking abut this Gannett deal, not Gatehouse's bankruptcy 6 years before, I was really confused, trying to figure out what happened to a third group of Gannett shareholders and what it had to do with the conversation we had been having.

When I did figure out you were talking about Gatehouse, and we are no longer on Gannett, it still wasn't 100 percent clear, because that narrative you gave me was odd, to put it mildly.

Again, this new thing you are on, happened 6 years before Gannett sold itself and didn't involve Gannett. But since we are on Gatehouse now. ... there was a lot of history with Gatehouse that you are kind of glossing over and confusing. To go back. ... Fortress bought Liberty Media Group in the 2000s. It paid more than half a billion dollars. They renamed their new newspaper "empire" Gatehouse and held onto a majority stake (they IPOed the rest to trade publicly). They then went on a giant debt binge (the Fed was incentivizing all kinds of stupidity during that period, and Gatehouse jumped in recklessly and created a debt bomb of a company) buying up hundreds of failing newspapers. ... just expanding like mad on the back of cheap (and mispriced) debt. The newspaper business continued to go to pot, and the billion + dollars of debt they had taken on buying papers destroyed the company. When the debt bubble that stupid strategy relied upon popped. ... Gatehouse did declare bankruptcy in 2013 (what gave me an inkling that is what you were talking about). Fortress, FWIW, got killed on its original equity investment in which it thought it could consolidate the newspaper industry and be a mogul.

Rather than go through your narrative which is a strained description of what happened, here is reality (I was working mostly from memory, looked up some details).

Gatehouse had debt that was probably on the order of $1.2 billion, so I assumed that is what you are talking about. Prior to the bankruptcy, Fortress had been buying up Gatehouse's debt, making Fortress the company's largest creditor. Yes, Wes Edens (i.e. Fortress) had used a REIT owned by Fortress called Newcastle to load up on that debt. You are right about them accumulating 52 percent of the outstanding debt. ... and I am certain that they were buying that debt (which was heavily distressed) very cheaply. When a company is on the ropes, its debt gets riskier as default becomes more of a possibility, and creditors are often eager to unload, even at a discount, thinking it is better to get a portion of their principle back than potentially get nothing back.

FWIW, almost anyone determined to become the majority debt holder could have bought that debt for X cents on the dollar by then (I don't know what Fortress paid); few people probably wanted to. It was risky. But with bankruptcy looking more and more imminent, they could have done what Edens did. ... become majority debt holder by buying up a lot of distressed debt, refuse to take a haircut -- i.e. engineer the bankruptcy -- and then negotiate a debt for equity swap, which is what I believe happened. That kind of thing isn't that out of the ordinary. It's also not necessarily the heads I win, tails I win move I suspect you think it is. Even if Edens bought that debt relatively cheaply, he did pay something for it and risked losing that money (on top of all of the money Fortress had already lost as an equity investor). What the move did was make him the owner of . ... a battered business operating in a dying industry. Obviously, the intention was to get a return on investment in other ways, because he knew that the equity they accepted in bankruptcy was likely going to become increasingly more and more worthless. Which is why I am certain that they used a REIT that would then have to divest itself of the equity quickly (they learned their lesson). ... but not before setting it up so that Fortress was set up to get something. ... an agreement in which they got paid to manage New Media. This was the "reward" they got for agreeing to the bankruptcy.

As for how it played out post bankruptcy, I am not sure what you are looking for from me. I get that you find what happened morally repugnant. First thing I'd point out is that without that sleaziness, the bankruptcy of Gatehouse might have gone very different. Whoever owned the debt would likely have been way more reticent to exchange it for equity without the kind of sweetener that Fortress engineered for itself with its control. The alternative may have been a fire sale of those newspapers, in which the value got taken out of the company on the front end via the sales prices (as opposed to it getting taken out the way you find wrong).

But sticking to how it actually played out, you asked me what is the "moral justification" is. I have no idea how to answer that. I believe that New Media was a private company at the time. It didn't involve me. I'd have no more opinion about how the owners of something manage what they own -- because I had no financial stake in it -- than I would about a business deal you are personally involved in that doesn't involve me. New Media did go public sometime in the year or two after that. I have never owned the stock, so again, why I would I care what the company does? If I even considered it and I thought it was being poorly managed (i.e. -- a shitty management contract that benefits Fortress, but doesn't benefit me as an owner), I would quickly look for other investment opportunities, assuming I couldn't take majority control or rally other investors and change how it is being run.