Wednesday, April 26, 2006

Is S.F. Chron next on Dean's list?

The $1 billion deal enabling MediaNews Group to acquire three more newspapers in Northern California could be the first step toward someday rolling the San Francisco Chronicle into the group, too.

If this happens – and there are several reasons why it might not – MediaNews would dominate the Northern California market with more than 1.1 million daily readers.

Regardless of whether the Chronicle ever joins the fold, MediaNews already has put together the largest and smartest strategic rollup of newspaper properties since Guttenberg invented movable type.

When the planned deal is closed, the Chronicle will be surrounded and MediaNews will have more than doubled its aggregate circulation to some 650,000 daily readers. That beats by roughly 100,000 copies what for decades had been the largest circulating paper in Northern California.

The strategy of putting multiple titles in a market under common control is likely to be emulated elsewhere before long, because it is almost sure to grow sales, cut costs and significantly improve profits. Clustering, as this new operating model is commonly called, will go a long way toward equipping the newspaper industry to compete in the increasingly fragmented media environment of the future.

While many news people and readers are concerned that an emphasis on efficiency may affect the quality of reporting, clustering actually may prove to be good for journalism. To the extent operations are streamlined outside the newsrooms that have been ground zero in recent industry cost-cutting initiatives, new resources will become available to enrich coverage. Only time will tell whether publishers will invest some of their new profits in improving the quality and appeal of their papers.

Dean Singleton, the CEO of MediaNews, stitched together his Northern California newspaper empire in the same way he built a handful of cast-off papers into what is about to become the fourth-largest publishing company in the land. That is to say, he skillfully cut a series of alliances with a Who's Who of cash-rich publishers to gain the capital he needed to expand his holdings.

The intricate transaction announced Wednesday, which features lots of moving parts, is a classic example of Dean’s creativity:

1. McClatchy Newspapers, the successful acquirer of Knight Ridder who decided to divest a dozen papers on the day it agreed to buy the chain, is selling the San Jose Mercury and Contra Costa Times directly to MediaNews.

2. McClatchy is selling the Monterey Herald and St. Paul Pioneer Press to Hearst Corp., the owner of the San Francisco Chronicle.

3. Hearst intends to give its new purchases to Media News in exchange for a share of equity in the MediaNews holdings outside the San Francisco market.

4. If Hearst cannot gain regulatory approval to swap the acquired papers for equity in MediaNews, then Media News will buy the properties outright from Hearst.

5. MediaNews intends to contribute the San Jose Mercury News and Contra Costa Times to California Newspapers Partnership, which is owned 54.23% by MediaNews. Gannett, the nation's largest newspaper publisher, and Stephens Media, of Arkansas, own the rest.

If you wonder why Hearst would enter into a transaction to help strengthen a direct competitor, the reason that comes to mind is this: Hearst hopes at some point to work with MediaNews to extricate itself from the costly problem posed by the San Francisco Chronicle, which is widely believed to be losing about $1 million per week.

A merger, of course, might run afoul of antitrust laws, because a combination of all the principal dailies in a market would reduce competition in a manner traditionally opposed by the Justice Department. This obstacle potentially could be removed in a more relaxed political climate or through some sort of new ownership structure at MediaNews.

The alternative to an out-and-out merger is the establishment of a joint operating agreement (JOA) between MediaNews and the Chronicle.

JOAs were created in the 1920s to give the federal government’s blessing to corporate structures that allowed two competing publishers in the same town to combine their advertising, circulation and production departments so they could cut operating costs, improve profitability and maintain two distinct editorial voices by continuing to publish their respective papers.

Between 1965 and 2000, the San Francisco Chronicle was published in a JOA with the San Francisco Examiner, which then was owned by Hearst. In 2000, Hearst bought the Chronicle for some $600 million. Hearst had to pay a San Francisco publishing family about $66 million to take over the Ex so it could neutralize a challenge from local activists opposed to the sale of the Chronicle.

The last six years have not been kind to the Chronicle, which has suffered a drop in advertising revenues, declining circulation, higher costs and increasing online competition. In short, the once-formidable Chronicle has turned into exactly the sort of troubled newspaper that JOAs were designed to save.

Unlike some publishers who shun JOA relationships, Dean Singleton has embraced them – and seems to be making them work – in places like Denver and Detroit.

Is the San Francisco Chronicle next on his list?