) - Phil Murray, a partner at the pre-eminent newspaper advisory firm Dirks, Van Essen & Murray, based in Santa Fe, N.M., says mergers and acquisitions among print legacy businesses remain vibrant even if volume has declined in recent years.

Murray, a former journalist, was talking about the future of newspaper dealmaking after Wes Edens, Chairman of

Newcastle Investment Corp.


, a health care real estate investment trust and affiliate of the private-equity firm

Fortress Investment Group

, said last week that his company is prepared to spend as much as $1 billion aggregating small and medium-sized newspapers into New Media, the working name of the entity that will combine Fortress's

Gatehouse Media


with the publications that Newcastle acquired last week from

News Corp.'s


Dow Jones Local Media Group.

"There is sufficient deal flow for GateHouse/Newcastle to spend $1 billion if they want to," Murray said, in a phone interview from Santa Fe.

Gatehouse, which has $1.2 billion in debts, said it plans to file a "pre-packaged bankruptcy" this week with creditor support.

"That wouldn't have been a lot six years ago, but one billion dollars buys you a lot of newspapers now," Murray added. "A lot of newspaper dealmaking is driven by building larger, regional clusters that make it more attractive to sell larger advertisers on a digital footprint. The Dow Jones papers fit pretty well with what they've already got."

So far in 2013, newspaper mergers and acquisitions have totaled $635 million, just about even with all of 2012 when deal volume reached $643 million, according to data compiled by Dirks, Van Essen & Murray. Of course, Jeff Bezos' purchase of

Washington Post's


namesake publication pads that number. In 2011, newspaper M&A hit $789 million, a gigantic rebound from 2010 when dealmaking totaled just $149 million.

Those were all down years compared to life before the 2008 recession, when newspaper deals totaled $2 billion to $3 billion per year, Murray added. M&A activity in the industry skyrocketed to a record $20 billion in 2007, that year of drunken-spending when Sam Zell overpaid to take



private and Rupert Murdoch succeeded in fulfilling his dream to own

The Wall Street Journal


News Corp.

(NWSA) - Get Report

paid top-dollar to take control of Dow Jones Co. In that same year, Gatehouse bought a handful of newspapers from


(GCI) - Get Report


These days, the size and scope of newspaper dealmaking is smaller, even if the aspirations are just as lofty. Fortress and Newcastle remain, at least publicly, confident that a newspaper company, freed of excessive debt and focused on small-and-medium-sized markets, can be a profitable business.

Newcastle said last week that it obtained assurances from creditors owed $1.2 billion in Gatehouse debt to exchange equity in New Media at a rate of 40 cents on the dollar. Gatehouse owns 400 newspapers and 350 Web sites, and when combined with its $87 million acquisition of Dow Jones Local Media Group, will take control of

The Stockton (Ca.) Record


The Cape Cod Times

, six other dailies and 15 weeklies. Edens argues that the business can be healthy unencumbered by arrears, and Murray agrees.

"Revenue has been slipping at Gatehouse but overall their problems have been balance sheet problems, not problems on the income statement," Murray said. "They were among many newspaper companies, and other companies for that matter, that just got out over their tips when it came to leverage prior to 2008."

Time was when the notion of locally-focused newspapers with strong ties to local advertisers and local communities equated into a can't-miss business. This sentiment ran strong even after large metro newspapers began carving out large sections of their newsrooms around 2005.

Gatehouse was front-and-center in this rosy view. The Fremont, New York-based newspaper chain continues to be guided by Michael Reed, a community-newspaper devotee who, together with Fortress, began buying groups of small newspapers and weeklies to create a company with $491 million in 2012. (Newcastle forecasts Gatehouse revenue to slip to $475 million for 2013 rising to $489 million next year.)

Optimism about hyper-local newspapering was reflected in Gatehouse's October 2006 initial public offering, which jumped 18% on its first day of trading to $21.17. But the realities of newspapering at a time of declining advertising sales soon encroached, forcing Gatehouse to miss its second-quarter 2007 revenue forecast. The stock tumbled to $7.62 by November of that year.

A prepackaged bankruptcy would appear to be good news for Gatehouse, which did show an operating margin of 6.1% for 2012, an indication that without an onerous debt burden, the company could post better results. GateHouse did lose more than $80 million over the past ten quarters, though once again, Newcastle says that was largely due to debt payments.

If Gatehouse's

pre-packaged bankruptcy

does produce a cleaner balance sheet, Newcastle plans to use the new company's "20% to 25% unleveraged returns" to spend a hefty $1 billion buying additional local media assets.

Clearly, someone still sees a bright future for local media. Gatehouse closed at just over two cents per share on Monday.

-- Written by Leon Lazaroff in New York

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