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New Media rolls up Main St. newspapers, prints cash for Wall St.

Michael Santoli
Michael Santoli

A newspaper salesman sells papers at his newspaper stand in California in 2006. Lee Enterprises, one of the largest newspaper chains in the United States, filed for bankruptcy on Monday, the latest victim of the crisis gripping the US newspaper industry.

In a typical bit of boastful Wall Street irony, New Media Investment Group (NEWM) is dedicated to the very Old Media business of owning small newspapers.

Yet the greater paradox might be that its stock is dazzling a New York investment world that’s otherwise more infatuated with the next global revolution than yesterday’s local news. The shares are up more than 120% in the year since New Media was spun off as an independent public company.

New Media is the country’s largest owner of community newspapers and other local publications, and is the most aggressive acquirer in the industry. It has a handful of larger dailies such as the Providence Journal and The Record of Stockton, Calif. But the majority of its 500 titles are small-town dailies, weeklies and “shoppers,” which generally are the only source of community news and the main game for local advertisers – Main Street organs such as the Daily Siftings Herald of Arkadelphia, Ark., and the Dodge City Daily Globe in Kansas.

Such papers and their Web sites are a bit more insulated from the encroachment of digital platforms on big-city and national news outlets. AOL Inc.’s (AOL) The Patch network of hyper-local sites was a bold effort to make a play for community news and ad dollars. It had mixed success and caused investor dissatisfaction, and was handed off a year ago to a private investment firm.

The resilience of local publishing is a reason that Warren Buffett has put money into this area, having invested in Media General Inc. (MEG) while acquiring a few dozen of its papers in 2012.

Nearly all of New Media’s properties have been around for more than 50 years, yet some 80% of them have an online presence.

Despite the prevailing Wall Street view that Facebook Inc. (FB) and even Twitter Inc. (TWTR) are succeeding Google Inc. (GOOGL, GOOG) as the leading threats to entrenched newspapers, investors always flock to a business using capital in a smart way to grow profitably even in a no-growth business.

This has been New Media’s approach to rolling up the local media industry. An earlier iteration of the company was known as Gatehouse Media, employing plenty of debt to buy smaller publishers before the financial crisis.

It was acquired by private equity giant Fortress Investment Group (FIG) in 2005, ran into financial trouble, was tucked into mortgage real estate investment trust Newcastle Investment Corp. (NR) and finally spun off as New Media in February 2014.

The company emerged with a share price near $10, a market value around $300 million, Fortress as its outside manager for an annual fee and a stated strategy of seeking $1 billion worth of acquisitions over the next three years.

A year later, New Media itself is valued around $1 billion and is already more than halfway to its purchase target, having inked more than $500 million in acquisitions so far. The latest was announced late last week, a $102 million deal for Stephens Media, owner of eight dailies, 65 weeklies and 50 Web sites with combined circulation above 200,000.

Robert Sassoon of New York brokerage R.F. Lafferty & Co., among the small group of analysts who cover New Media, notes that the company is benefiting from the broad pressures on traditional publishers by finding properties to buy cheap.

It is paying between three-and five-times cash flow for businesses, while New Media’s own stock trades closer to 10-times cash flow. This means deals immediately add nicely to New Media’s cash profits and allow it to pay a generous dividend that now gives the stock a 4.8% yield.

Sassoon notes that “there is not much competition” for local-media acquisitions right now. Public players aren’t in hunting mode. Lee Enterprises Inc. (LEE), for instance, is heaving under heavy debts, and Buffett has been quiet on the newspaper deal-making front.

Investors have been eager to subscribe to a few stock offerings by New Media in the past year that are funding its M&A strategy. This makes New Media something of a publicly traded private-equity vehicle, directed by the deal-making sharpies at Fortress - only one financed largely through equity rather than debt. While hardly a widely followed stock, New Media is owned by a handful of astute value investors, including Leon Cooperman’s Omega Advisors, which owned nearly 7% of the company, at last report.

New Media management is careful to keep leverage to modest levels to avoid the trauma that befell its predecessor company as the credit and advertising cycle buckled in sync.

New Media is due to report its fourth-quarter results, and an updated dividend policy, Thursday morning.

Aside from executing smart financial maneuvers, New Media is pushing to grow Propel, its digital advertising platform for small and mid-sized businesses. The local and small-business advertising market is now a hotly coveted prize in the digital-media industry, forming the entire basis for such hefty players as Yelp Inc. (YELP) and a big part of Google’s appeal.

New Media’s approach is to buy publications with underdeveloped online-ad capabilities and plug them into Propel to build a digital revenue stream.

How much growth New Media can generate selling online ads to pizza shops and plumbers remains to be seen. But for now the company seems to have a pretty good formula for buying stable, no-growth, but profitable businesses on the cheap and sharing the copious free cash flow with investors.

While the shares no longer look cheap at $23.50, or around 20-times forecast 2015 profits of $1.15 a share, Sassoon thinks the company is a “free cash flow machine” and has a price target of $37. While that might appear an aggressive call, this company has shown a knack for surprising the Old Media skeptics.