Leonard Green To Drop Paper Route –

After about eight years dealing in the space, Leonard Green & Partners LP is getting out of the newspaper business. The Los Angeles-based buyout shop is selling all of its interest in Liberty Group Publishing Inc. to New York’s Fortress Investment Group LLC in an all-cash transaction expected to close by months end. Both firms declined to disclose a purchase price, but a source close to the transaction confirmed it at about $530 million.

Leonard Green formed Liberty in 1997 when it acquired approximately 170 newspaper titles from Hollinger International Inc. for $310 million. Today, the Northbrook, Ill-based company publishes more than 300 daily, weekly and free shopper newspapers in small towns and niche markets across the U.S., reaching about 2.1 million people on a weekly basis.

The agreed-to sale of Liberty represents an end to Leonard Greens three-year wait to liquidate its stake in the publisher. In June 2002, the firm attempted to float Liberty in a $225 million IPO that was pulled in 2003. Then, in August 2004, Leonard Green hired Bear Stearns & Co. Inc. to run an auction for the newspaper publisher. The firm received a number of offers from financial and strategic buyers that were close but, not quite attractive enough, for what it was hoping to get, the source said.

As a result, Leonard Green terminated the sale process, choosing instead to refinance Liberty with debt provided by Wells Fargo Bank. It wasnt until after the auction process that Fortress, unsolicited, approached Bear Stearns with the offer that Leonard Green ultimately accepted, the source said.

Fortress, which currently manages about $5 billion of private equity capital on behalf of both institutional investors and high net worth individuals, will use bank financing from Bear Stearns to fund the acquisition.

The agreed upon price will dish out a 1.7x return on Leonard Greens investment, or a little more than $100 million, the source said, noting that Liberty is a portfolio company of both the $310 million Green Equity Investors II LP and the $1.24 billion Green Equity Investors III LP, the latter of which had a 27% gross IRR as of December 2004.

Under Leonard Green, Liberty went on an acquisition spreebuying up individual titles as well as regional clusters of small newspapers, most with circulations between 5,000 and 12,000, the source said. The typical price of these types of purchases fell below the $10 million mark, the source added.

While some larger, metropolitan newspapers have been experiencing losses in readership and revenues due to television and Internet competition, Liberty has seen no material erosion in the form of lost advertising or subscriptions, said the source, adding that the newspaper publishers circulation numbers are level, with an average 60% readership rate in many of the markets it operates in.

To understand what Liberty is all about, you have to get your head out of The Wall Street Journal and The New York Times. This is more of the Who got arrested Friday night?, Whats going on in city counsel?, Who won the high school football game? category of the newspaper market. Most of [Libertys] markets dont even have a television competitor, the source said.