The Deal: Beating Murdoch on His Home Turf

NEW YORK ( TheStreet) -- Some M&A maneuvers are so complicated they obscure the details of any one transaction. And that's very much the case these days with a three-step deal that Newcastle Investment ( NCT) is putting together.

Step 1: Newcastle, an affiliate of Fortress Investment Group ( FIG) acquires Dow Jones Local Media Group for $82 million. Step 2: Newcastle restructures debt-funded GateHouse Media,which is also a Fortress affiliate, through a prepackaged bankruptcy. Step 3: Newcastle spins off a new entity that combines a post-bankrupt GateHouse with Dow Jones Local Media Group.

The spunoff entity, to be named New Media, is expected to be 60% owned by Newcastle -- a majority the company plans to obtain through its conversion into equity of more than half of GateHouse's $1.2 billion in debt and through its donation of $54 million in Dow Jones Local Media Group equity. Then, from the free cash flow generated by its hyperlocal media operations in more than 400 communities, New Media starts paying 20% dividends.

That's the plan, anyway, as presented by Newcastle during a conference call earlier this month. It's a good plan, too, except that its many moving parts give short shrift to the terms by which Newcastle secured Dow Jones Local Media Group from Rupert Murdoch's News Corp. ( NWSA) Murdoch is supposed to know and value newspapers, but in this case Newcastle clearly got the better of him.

Never mind that on announcing the sale, but before its terms were disclosed, Murdoch lieutenant and News Corp. CEO Robert Thomson called the jettisoned properties no longer "strategically consistent with the emerging portfolio of the new News." Thomson's declared motivation for selling detracts not at all from Newcastle's walking off with Dow Jones Local Media Group's 33 publications for a nominal EBITDA multiple of 3.4 and, once $33 million in third-party appraised real estate is removed from the transaction, for an effective EBTIDA multiple of 2.0.

Although this multiple drops even lower (to 1.6, to be precise) after consideration of $10 million in already identified cost reductions, let's overlook such synergies for now and defer instead to Newcastle chairman Wes Edens. "We paid roughly $50 million for an asset that we think is going to produce $25 million in cash flow next year," he said during the conference call about his company's acquisition of Dow Jones Local Media Group. "So maybe not the growthiest asset in the world ... but $50 million for $25 million in this market we think is a tremendous asset."

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