Newcastle Investment Announces Plan To Spin Off Media Assets To Shareholders

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Newcastle Investment Corp(NCT), which in May spun off a residential REIT, the creatively named New Residential Investment Corp(NRZ), has announced plans to spin off its media business to shareholders.  Newcastle is a bit of a strange beast. It is structured as a REIT and controlled by Fortress Investment Group (FIG). The transaction itself is strange as well. Newcastle owns both Local Media Group, a chain of local newspapers which it purchased from  News Corp(NWSA) in September, and 52% of the outstanding debt of Gatehouse Media. Fortress, which controls Newcastle and also owns 40% of Gatehouse’s common stock, arranged for a prepackaged bankruptcy that would give Newcastle majority ownership of Gatehouse. On emerging from bankruptcy, Gatehouse will join the Local Media Group under the umbrella of New Media Investment Group, Inc.(another wildly creative name). Newcastle, which will own the majority of New Media Investment Group, will spin out its stake to shareholders in early 2014.

A critical milestone was reached yesterday, as the judge in the bankruptcy case approved the plan. The new company, free of its debt, will be a formidable competitor with over 300 local daily and weekly newspapers as well as websites and other media. It is worth noting that Warren Buffett’s Berkshire Hathaway (BRK-B) has been purchasing similar small, local newspapers as the only newspapers with any continued competitive advantage and profitability.

On Newcastle’s earnings call last Friday, Chairman Wesley Edens shared an updated projected timeline for the transaction, stating that the goal was to distribute shares sometime around January 1:

And then lastly on the media side, we announced, during the quarter, the restructuring and the spin of that, just a second on that. So invested capital, we show, at the end of the Q3, $263 million that is roughly as just for what the amount of capital will be spent out here in the very near-term in the form of equity of New Media.

The New Media company is in bankruptcy, being restructuring right now and is expected to emerge very soon. We think that the timeline for that is next Wednesday, the 6, we’ll have a confirmation hearing, to confirm that the company will come out and expect it actually be spun back out to us in the form of equity on about the November 12.

We have filed with the SEC to then spin that company out to shareholders. Every shareholder of Newcastle will also get a share of New Media. We’ve gotten one set of comments, expect to re-file in the next day or so. I think we’re on track through the SEC hopefully in the month of December, and have that share of stock in hands around the first of year.

To say that newspapers are an unglamorous business would be a vast understatement. That said, these papers appear to be in the right part of the marketplace, and, relieved of their debt, may prove to be surprisingly profitable. Or perhaps not. The numbers in the company’s 10-12B filing show unabated losses under Fortress’s management, which will be continuing. Ultimately, there may be no part of this industry which has any real future. As a longtime lover of newsprint, we want to like this company, but the conditions are just too adverse and foggy for us to be enthusiastic.

Disclosure: The author holds no position in any stock mentioned, except Berkshire Hathaway

 

 

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