Judge's Ruling Could Derail or Delay Hearst/MediaNews Deal

By: E&P Staff A federal judge in San Francisco appears poised to at least temporarily block the complex deal between Hearst Corp. and MediaNews Group Inc. for the ownership -- and the fast-moving consolidation -- of the San Francisco Bay Area's daily newspapers, according to several press reports Thursday.

U.S. District Court Judge Susan Illston said at a hearing Wednesday that she will rule next week on the motion by real estate developer Clint Reilly to impose a temporary restraining order on the $1 billion deal that transfers control of three Bay Area dailies, including the San Jose Mercury News, to Dean Singleton's MediaNews. In exchange, Hearst, the publisher of the Bay Area's biggest daily, the San Francisco Chronicle, would get an equity stake in MediaNews's non-Bay Area operations.

According to press reports on the hearing, Illston said she was inclined to grant Reilly's motion to temporarily prevent the two companies from discussing combining advertising sales and circulation distribution -- but was leaning against his request to stop the rapid-fire series of changes MediaNews has imposed on its new and long-held papers.

District Court in San Francisco on Wednesday, Illston said she was leaning toward granting part of Reilly's request to temporarily bar the publishers from some discussions, but was not inclined to step in and temporarily stop the way they are operating the newspapers. Reilly's lawsuit contends the deal would give monopoly control of effectively all Bay Area newspapers to MediaNews.

Among the cost-cutting measures MediaNews has implemented are layoffs of about 100 employees and consolidation of copy editing functions for several papers to a central location. The chain recently announced it was outsourcing its ad makeup to a company in India. The Chronicle recently announced it was outsourcing its printing operations.

Illston made her comments after Reilly attorney Joseph M. Alioto disclosed an April 26 agreement between Hearst and MediaNews in which the companies agreed to "negotiate in good faith" to consolidate circulation operations and offer national advertising through their Web sites. Alioto contended the agreement violated assurances that despite the agreement to give Hearst a stake in MediaNews, the two companies would compete in the Bay Area, and amounted to a discussion of price-fixing..

The document is still under a seal imposed on nearly all Hearst and MediaNews materials, but was read in part at the hearing.

Illston asked attorneys for Hearst and MediaNews why they had not disclosed this letter at a hearing in July, when she turned down an earlier Reilly request for a temporary restraining order to block the sale of the Mercury News and the Contra Costa Times from the McClatchy Co. to MediaNews.

The lawyers said they did not think it was relevant, and that it was simply an agreement to discuss possible collaboration in specific areas.

The Hearst/MediaNews deal resulted from this summer's sale of Knight Ridder Inc. to McClatchy, which immediately put a dozen of the papers up for sale, including three in the Bay Area. MediaNews bought Mercury News and Contra Costa Times, while Hearst bought the Monterey County Herald and the St. Paul Pioneer Press in Minnesota. Hearst agreed to give those papers to MediaNews in exchange for a stake in MediaNews properties excluding Bay Area papers.

Wednesday's hearing was reported by Chronicle Staff Writer Carolyn Said; Pete Carey of the Mercury News; and Bloomberg News reporter Karen Gullo.