MediaNews bankruptcy hit Hearst hardest

After plowing well over $1 billion into a decade-long effort to salvage its ill-starred purchase of the San Francisco Chronicle, the Hearst Corp. now stands to lose another $317 million in the upcoming bankruptcy of MediaNews Group.

Hearst improbably put money into MediaNews, its direct competitor in northern California, in the hopes of reversing the almost continuous loses it has suffered since stepping up to buy the Chronicle in 2000. Instead of fixing the long-festering problem, Hearst became not just the biggest loser among the equity investors in MediaNews. It will be the only one.

Neither MediaNews chief Dean Singleton nor his long-time business partner Richard B. Scudder will lose a nickel in the bankruptcy, because neither ever put any of his own money into the company, said a MediaNews spokesman. But they aren't unscathed. Each of the MediaNews founders will suffer the complete loss of paper gains that at one point theoretically were worth as much as $500 million per man.

Although Singleton built MediaNews over the years by partnering with such big-name media companies as Gannett, Stephens Media and E.W. Scripps, only Hearst will lose hard dollars in the upcoming bankrupcty of Affiliated Media, the parent of MediaNews.

Affiliated Media is expected to file for Chapter 11 this week because it has been overwhelmed by $930 million in debt. In announcing the planned bankruptcy on Friday night, MediaNews tried to distance itself from the news by saying the filing by Affiliated Media would not affect the operation of its newspapers. However, Affiliated Media and MediaNews appear to be essentially one and the same entity.

MediaNews Group is the name of the company that originally borrowed the debt occasioning the bankruptcy. And it also is the name of the company that reported its finances to the Securities and Exchange Commission until 2008, when its bankers said the privately held firm no longer had to do so.

For the sake of clarity, it makes sense to call the company MediaNews. So, that’s what I will do.

The terms of the reorganization proposed by MediaNews would give bondholders 80% ownership of the going-forward company, with Singleton and key managers sharing the other 20%.

MediaNews would emerge from bankruptcy owing a comparatively modest $165 million in debt. This would chop its indebtedness by 82% and presumably give it the power to borrow more money to – as the press release said – “give us a platform from which to develop, grow and participate in the consolidation and re-invention of the newspaper industry.”

The rise, pending reorganization and hoped-for future expansion of MediaNews are consistent with Singleton’s uncanny ability over the years to use other people’s money to build what has become the second largest chain of newspapers in the nation.

Scudder, who now is in his mid-90s and serves as chairman of the MediaNews board of directors, gave Singleton the money in 1983 to buy the first newspaper in what would become the expansive MediaNews Group. Today, Singleton runs 54 daily papers and more than 100 non-daily publications, which were accumulated through an intricate series partnerships with not only Hearst but also Gannett, Stephens Media and E.W. Scripps.

Of all the publishing partners involved in the MediaNews juggernaut, however, the only one who will lose money in the upcoming bankruptcy is the Hearst Corp., said the company’s spokesman.

Hearst’s likely loss is a direct result of its hapless, and so far hopeless, effort to make good on the ill-fated acquisition of the San Francisco Chronicle.

After sinking the better part of $700 million into buying the San Francisco daily in a lengthy, painful and costly legal process that began in 2000, Hearst has been forced since then to underwrite ongoing losses ranging as high as $1 million a week.

Thanks to a series of draconian staff cuts and a decision to rent spare office space in its now sparsely occupied building, the newspaper was said to be breaking even at the end of 2009. If so, that would be the first time in the history of Hearst’s ownership of the newspaper.

In addition to the estimated $1.2 billion Hearst has spent to date on buying and running the newspaper, it now faces the loss of the $317 million that it invested in MediaNews in a complicated – but subsequently scuttled – effort to partner with MediaNews to rescue its investment in the Chronicle.

And that might not be the end of it. With Hearst already looking at a $1.5 billion crater at the Chronicle, things could get worse – maybe as much as $1 billion worse – if it tries to sell or shut the newspaper. Here’s why:

To save an estimated $25 million a year on production expenses, Hearst contracted with a Canadian company to print the Chronicle at a new $230 million, state-of-the-art plant whose construction was fronted by the printer. The deal with Transcontinental Printing Co. calls for Hearst to pay the printer more than $1 billion for its services over the life of the 15-year deal.

To guarantee those payments, Transcontinental said the contract “provides for indemnification from Hearst Corp. should the San Francisco Chronicle cease publication or be sold,” according to a filing to the Canadian equivalent of the Securities and Exchange Commission. The details of the filing first were reported in September in the Dead Tree Edition blog.

Hearst’s problems at the Chronicle began immediately after it announced an agreement in 2000 to buy the paper for $600 million from the descendants of the founding de Young family. Hearst and the de Young family were equal partners in a joint-operating agreement that published the Chronicle and the San Francisco Examiner, which then was owned by Hearst.

The sale drew an immediate legal challenge from Clint Reilly, a San Francisco investor and civic gadfly, who was concerned that the Examiner would go out of business – leaving the city with only a single editorial voice – if no one responded to what he feared would be a perfunctory effort to find a buyer for the ailing afternoon newspaper.

After months of litigation, Reilly forced Hearst to give the Examiner – plus $66 million to run it – to a family publishing a local Asian newspaper. Reilly’s lawyer got $2.8 million in compensation from Hearst, but Reilly says he got nothing for himself. (The Examiner now is owned and operated as a free tabloid by billionaire Phillip Anschutz.)

By the time Hearst finished tussling with Reilly and closed the deal on the Chronicle, the economy in Northern California had collapsed as a result of the tech bust and the 9/11 terror attacks. The paper suffered a vertiginous drop in advertising sales, particularly in the highly profitable employment category. Further, the paper was burdened by the cost of sustaining not only the original Chronicle editorial staff but also by its decision to bring the entire Examiner staff to the Chronicle, too.

Luckily for the Chronicle, the New York-based company could support it with the ample profits produced by its other, more successful media and real estate holdings.

While Hearst subsidized years of losses in the hopes that business would turn around, Singleton was busily acquiring and consolidating newspapers all over northern California, encircling the Chronicle at almost every turn. In his trademark approach to operating newspapers, Singleton squeezed fresh profits out of every acquisition by eliminating redundancies and cutting headcount to reduce costs.

When investors forced the sale of Knight Ridder in 2006, Hearst saw a chance to get healthy on the Chronicle deal by, ironically, helping Singleton buy the only two dailies he needed to complete the collection of properties he had arrayed around the Chronicle: the San Jose Mercury-News and the Contra Costa Times. (The papers were put up for sale by McClatchy, which decided to keep only two-thirds of the former Knight Ridder chain.)

Because Singleton himself lacked the financial wherewithal to buy the dailies he long had coveted, Hearst kindly helped MediaNews assemble $1 billion to buy the two publications plus the Monterey (CA) Herald and the St. Paul Pioneer Press. In return, Hearst got a share of equity in MediaNews.

The amount of cash Hearst put up in the deal was $317 million. And that’s the money Hearst stands to lose in the upcoming MediaNews bankruptcy.

Why, you might wonder, did Hearst do this?

Hearst came of the aid of its seeming competitor in the hopes that they together could enter into some sort of operating partnership to staunch the losses Hearst was continuing to fund at the Chronicle.

But the nascent partnership was thwarted by a successful new legal challenge from Clint Reilly, the long-time nemesis who dragged Hearst into court when it originally sought to buy the Chronicle.

Reilly won the second time, too. As part of an undisclosed multimillion-dollar settlement, Reilly gained not only the right to inspect certain communications between MediaNews and Hearst but also the right to publish a weekly column in several MediaNews papers.

Assuming Hearst and MediaNews still are on talking terms after the bankruptcy, the most logical thing for them to do would be try again to find a way to combine the Chronicle with the sprawling Bay Area News Group operated by MediaNews. BANG, as it is known, sells 2½ times more newspapers each weekday than the 251,782 sold by the Chronicle.

While any deal almost certainly would require an antitrust waiver from the U.S. Justice Department, the parties would seem to have a pretty strong case, given the MediaNews bankruptcy, the long-running unprofitability of the Chronicle and the general alarm over the deteriorating state of the newspaper industry.

The biggest obstacle, however, could be Clint Reilly, who might try to extend his unblemished record of tweaking the media titans.