Wednesday, April 25, 2007

Hearst-MediaNews deal scuttled

A planned operating partnership between the competing Hearst and Media News newspapers in Northern California was scrapped today, unraveled by a San Francisco civic activist with an assist from the antitrust division of the U.S. Justice Department.

In a settlement to a suit challenging the pending partnership, businessman and activist Clint Reilly, the plantiff, gained an extraordinary role in overseeing the the combined group of Media News papers that together sell more than 800,000 copies a day in Northern California.

Clint will get the right to review and comment on both business and editorial decisions for at least three years, according to a summary of the settlement provided by him at a press conference in San Francisco. He says he'll even get a quarter of a page in the Media News papers once a week to comment on whatever he likes. "I might call it a Clintvertorial," he quipped.

Although the operating partnership in the Bay Area was derailed, Hearst will retain the right to acquire a 30% interest in Media News operations outside Northern California in exchange for buying the Monterey (CA) Herald and St. Paul Pioneer Press for approximately $263 million and giving them to Media News. Hearst had been in line to gain a 25% share in the Media News properties in Northern California but that has been scotched by the settlement, according to Clint.

(Correction: In my original post, I mistakenly stated that Hearst had put up $1 billion to buy the Herald and PiPress, along with the San Jose Mercury and Contra Costa Times. In fact, the Mercury and Times were purchsed by the California Newspaper Partnership, which is owned by jointly Media News, Gannett and Stephens Media.Media News is the majority partner with some 54%.)

The development is a blow to Hearst’s money-losing San Francisco Chronicle, whose plight previously was discussed here and, by all accounts, has continued to deteriorate.

Under the now-scuttled partnership, Media News and Hearst had planned to co-operate in such key areas as ad sales and newspaper distribution to drop the costs and raise the profits of their respective operations in Northern California.

While the Media News properties may not be as profitable as its shareholders and investors might like them to be, they are in the black. The Chronicle, on the other hand, is reportedly losing as much as $2 million a week. Its circulation was 451,504 in March, 2006, but has declined since then to less than 400,000.

With the cost savings of the planned partnership off the table, both publishers may have to look to deeper savings in their existing operations in an era of declining circulation and advertising revenues. Both of the publishers already have reduced staff in most departments; Media News is outsourcing ad composition to India, and the Chronicle already has announced plans to outsource printing to a Canadian company building a new, non-unionized plant in California.

The proposed collaboration of the two largest head-to-head newspaper competitors in the nation’s fifth largest media market attracted the opposition of Clint Reilly, a San Francisco real estate investor who periodically has taken an active behind-the-scenes role in local politics.

Learning last year that Hearst intended to invest in the business of the Chronicle's largest competitor in Northern California, Clint filed suit in federal court, charging the deal would be an improper restraint of trade. He argued that the arrangement would reduce competition for advertising, circulation and editorial content.

Clint had done all of this before. And quite successfully, too.

When Hearst sought to buy the Chronicle from the founding family in 2000 for $600 million, Clint went to court to save the money-losing San Francisco Examiner, the afternoon Hearst paper that appeared likely to be shut at the completion of the acquisition.

Clint’s challenge prevailed and Hearst wound up paying $66 million to a local publishing family to sustain the title. Hearst also gave Clint $2.8 million to compensate him and his attorney for their trouble. The Ex subsequently was sold to Denver billionaire Philip Anschutz and survives today as a free daily tabloid.

Though Clint’s lawsuit may have been the highest-profile challenge to the contemplated Hearst-MediaNews deal, it was not the only one.

The antitrust division of the Justice Department launched its own investigation of the transaction and evidently had concluded that the proposed arrangement would be anti-competitive. (Disclosure: I was one of several Bay Area media people interviewed by Justice lawyers and I didn't tell them any more than they could have read in Newsosaur.)

Documents obtained by Clint’s lawyer in pursuing his suit against Hearst and Media News indicated that the publishers evidently weren’t going to be engaged in as much arm’s length competition as they initially represented in their public statements. This disclosure, plus the Justice Department scrutiny, evidently encouraged Media News to settle Clint’s suit on the eve of a trial that was to begin on Monday.

Clint will be reimbursed for an undisclosed amount for attorney's fees and other expenses but says he will not be paid anything for the time he spent on the case or his upcoming service as the monitor of the Media News papers.

There’s more to come on this one. Stay tuned.


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