The biggest publishing merger of the year is starting to look like a bust.

Shareholders of New Media Investment Group — the publicly traded subsidiary of newspaper owner Gatehouse Media — have sent the stock on a dizzying downward spiral since Monday.

That’s when Gatehouse, the second-biggest newspaper chain in the country, unveiled its $1.4 billion cash-and-stock deal to devour USA Today owner Gannett Corp., the nation’s largest newspaper publisher.

At the time, the deal looked like it was going to give $12.06 a share for Gannett shareholders as it included a payout of $6.25 in cash and 0.5427 worth of New Media Investment Group stock for each share of Gannett stock.

But on Tuesday, the New Media Investment Group stock plunged over 18% — after a 7% drop on Monday. The stock hit a new 52-week low of $8 a share Tuesday before settling at $8.06.

“It’s a slaughter,” said one source close to Gannett. “How do you react if you’re a Gannett shareholder?” he asked.

One big surprise that has emerged since the deal was unveiled is that Apollo Global Management is providing 100% of the financing — or nearly $1.4 billion to cover the cash-and-stock portion of the acquisition as well as nearly $400 million to cover Gannett’s existing debt—for a total of $1.792 billion.

Financial sources tell my colleague Josh Kosman that normally such a huge deal would be syndicated to a handful of big banks rather than by a single private equity player.

Making matters worse, the interest on the senior secured debt is a sky-high 11.5% — and the note only has a five-year term instead of the standard seven years. Apollo could end up with a virtual lien on the entire combined company if the new company’s revenue continues to drop and it has trouble meeting the covenants on its debt.

When Gannett and New Media Investment Group announced the deal Monday, they were predicting savings of $275 million to $300 million a year by joining forces.

But as Ken Doctor, the Newsonomics columnist, told Media Ink, it will probably cost $100 million in severance and other one-time costs before any of the synergies can be realized.

Gannett’s stock was also off Tuesday by 7.6%, to close at $10.20. And shareholders seem to be bailing. There were 11,040,463 shares of New Media exchanged Tuesday — a 17-fold increase over its average volume of 626,459. Gannett was also trading heavily at 12,667,030 shares trading, above the average daily volume of just under 1.3 million shares.

Right now shareholders in both companies seem to be saying it does not look like a good deal for either company. Michael Reed, the chairman and CEO of New Media, has a big selling job ahead of him.

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