2.   ACQUISITIONS

During July, August and September 2013, Newcastle completed the acquisitions of 19 senior housing facilities in five different portfolios with properties located in New York, Florida, North Carolina and Pennsylvania. Each of these acquisitions was accounted for as a business combination, under which all assets acquired and liabilities assumed are recognized at their acquisition-date fair value with acquisition-related costs being expensed as incurred. For certain properties, Newcastle has retained a portfolio company of a private equity fund managed by an affiliate of the Manager to manage the properties. Pursuant to the agreement with the portfolio company, Newcastle pays management fees equal to (i) 5% of the property’s effective gross income (as defined in the agreements) or (ii) management fees equal to 6% of the property’s effective gross income (as defined in the agreements) for the first two years and 7% thereafter. For the other property acquired, Newcastle has retained a subsidiary of the Manager to manage the property. Pursuant to the agreement with the subsidiary of the Manager, Newcastle pays management fees equal to 6% of the property’s effective gross income (as defined in the agreement) for the first two years and 7% thereafter. In addition, Newcastle will reimburse the property manager for certain expenses, primarily the compensation expense associated with the on-site employees.

In connection with the acquisitions of the senior housing assets described above, the assets acquired and the liabilities assumed were recorded at fair value. A summary of the initial recording of each of the above acquisitions is as follows:

B. Acquisition of Media businesses

On September 3, 2013 Newcastle completed the acquisition of Dow Jones Local Media Group (“Local Media Group”) from News Corp. for $86.9 million, including capitalized transaction costs of approximately $4.3 million. Newcastle made a total equity investment of $56.3 million and financed the remainder of the purchase price with $33.0 million of debt. The purchase price is subject to a working capital adjustment. Newcastle also contributed $2.4 million to Local Media Group for working capital purposes that can be repaid from the $10.0 million of undrawn capacity described below. Newcastle assigned its interest in Local Media Group to a newly formed wholly-owned subsidiary, Local Media Group Holdings LLC (“Local Media Parent”). Local Media Group operates 33 local publications in 7 states in the United States and has been in business for over 75 years.

The above $33.0 million of debt was drawn from a $43.0 million credit agreement that Local Media Group signed on September 3, 2013 with Credit Suisse AG, Cayman Islands Branch and Credit Suisse Loan Funding LLC (collectively “Credit Suisse”) which bears interest at LIBOR + 6.5% with a LIBOR floor of 1% and matures in September 2018. The $10.0 million of undrawn capacity under the agreement which can be used for working capital and other general corporate purposes, will become available to Local Media Group on the revolver activation date pursuant to the terms of the agreement. Local Media Parent has provided a guarantee under the credit agreement and has pledged substantially all of its assets, including its interest in Local Media Group, as collateral to the credit agreement. The credit agreement contains customary financial covenants which include a maximum leverage ratio and fixed charge coverage ratio. Upon an event of default of Local Media Group, as defined in the credit agreement, some restrictions apply to Local Media Group’s ability to make dividends or other distributions.

The Local Media Group operations are managed by GateHouse, a portfolio company of a private equity fund managed by an affiliate of the Manager pursuant to a management agreement (“Media Management Agreement”). Under this agreement, GateHouse receives an annual management fee of $1.1 million, subject to adjustments (up to a maximum annual management fee of $1.2 million) plus 12.5% of the Local Media Group’s EBITDA in excess of budget (as defined in the Media Management Agreement) for overseeing and managing the Local Media Group’s businesses, assets and day-to-day operations. As a result of this agreement, management has determined that Local Media Group is a VIE and that GateHouse is the primary beneficiary because it has both the power to direct the activities that most significantly impact the economic performance of Local Media Group and it participates in the residual returns of Local Media Group that could be significant to Local Media Group. Therefore, since Newcastle is not the primary beneficiary it does not consolidate Local Media Group and records its investment in Local Media Group as an equity method investment.

The following tables present summarized financial information for Local Media Group:

Newcastle, which owns approximately 52.2% of GateHouse’s $1.2 billion of debt, has also announced that it has entered into an agreement with GateHouse’s other creditors related to a potential restructuring of GateHouse pursuant to a prepackaged plan of reorganization under Chapter 11 of Title 11 of the United States Bankruptcy Code (the “Plan”). Pursuant to the Plan, reorganized GateHouse will be contributed to New Media Investment Group Inc. (“New Media”), which is currently a wholly owned subsidiary of Newcastle, and GateHouse will use commercially reasonable efforts to raise a new debt facility in an amount of up to $150 million in accordance with the terms set forth in the Plan. As the Plan sponsor, Newcastle offered to purchase (or to have its designated affiliates or other designees purchase) the debt of the other creditors in cash at 40% of par (the “Cash-Out Option”). The creditors have the right to elect to receive (i) the Cash-Out Option and/or (ii) common stock of New Media and the net cash proceeds, if any, of the new debt facility (the “Equity Option”).  We and certain other creditors have elected the Equity Option, and creditors with approximately $369.9 million in debt positions, including expected accrued interest through the effective date, have elected the Cash-Out Option. In addition, Newcastle will contribute its interest in Local Media Group to New Media in exchange for common stock of New Media equal in value to the cost of the Local Media Group acquisition, as defined in the agreement. On September 27, 2013, GateHouse commenced the voluntary Chapter 11 proceedings in the United States Bankruptcy Court of the District of Delaware pursuant to the Plan. 

New Media has filed a registration statement with the SEC with respect to a planned spin-off from Newcastle. The spin-off is subject to certain conditions, such as the approval of the Plan by the Bankruptcy Court, the declaration of New Media’s registration statement effective by the SEC, the filing and approval of an application to list New Media’s common stock on the NYSE and the formal declaration of the distribution by the board of directors.