Apollo’s Plan Is to Loan, Not Own in $1.8 Billion Newspaper Deal

(Bloomberg) -- Apollo Global Management LLC co-president Jim Zelter knows what many on the Street are thinking.

Why would a private-equity firm -- whose name is synonymous with acquiring struggling businesses on the cheap and turning them around for huge profits -- make a $1.8 billion loan to a company in the beleaguered newspaper industry if it didn’t expect to own it one day?

When it comes to the financing of New Media Investment Group Inc.’s takeover of Gannett Co., he insists that’s not the plan. In fact, Zelter, a former banker who led the expansion of Apollo’s credit investment arm, says the rationale behind the firm’s largest-ever direct-lending commitment is simple: He believes the new company can thrive.

“This was always meant to be a performing loan,” he said in a phone interview. “It’s not a distressed-for-control transaction.”

Zelter -- who oversees about $200 billion of credit investments, more than double Apollo’s entire private equity portfolio -- says the transaction is a vote of confidence in New Media Chief Executive Officer Mike Reed and his track record in acquiring and managing media assets.

Yet that confidence comes at a steep price for the longtime news executive, who will take control of USA Today and major metro publications such as the Arizona Republic and Detroit Free Press once the Gannett acquisition closes.

The combined company will pay a 6.5% arranging fee for the five-year loan and an annual interest rate of 11.5%, according to regulatory filings. Apollo is expected to pocket the majority of the fee by funding the loan at a discount of 95 cents on the dollar, according to a person with knowledge of the matter who asked not to be named because the details are private.

A spokesman for New Media declined to comment. A spokesman for Apollo declined to comment on the fee.

“The merger has a lot of industrial logic,” Zelter said. “We believe Mike and his team will make the right moves in terms of being thoughtful about digital strategy and the manner they will operate the business going forward.”

The loan to New Media is one of many investments Apollo has made in out-of-favor sectors in recent years. Its private equity arm has bought DVD kiosks, penny-counting machines and discount grocery stores. As with all high-risk businesses, there’s always the possibility that things won’t work out as planned.

Looking at the interest rate, “you have to assume there is a lot of risk there,” Howard Marks, co-chairman of distressed-debt manager Oaktree Capital Group LLC, said in Bloomberg TV interview Thursday. “I would be surprised to learn that it’s loan-to-own, but depending on how risky the proposition is I’m sure that not getting paid and instead ending up as an owner must factor into the picture.”

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