The Hearst/MediaNews Letter: No BigDeal -- Or Deal-Breaker in the Bay Area?

By: Mark Fitzgerald Joe Alioto is never at a loss for words, but he sounded particularly ebullient on the other end of the line Tuesday night.

"What we discovered after going through 70 or 80 boxes ... isn't just a smoking gun -- it's the bullet coming out of the gun," Alioto said.

A U.S. District Court judge in San Francisco had just granted his client, local businessman Clint Reilly, a temporary restraining order (TRO) barring any sales or distribution collaboration between Hearst Corp., the publisher of the San Francisco Chronicle, and MediaNews Group Inc., publisher of the San Jose Mercury News, the Contra Costa Times, and 42 other newspapers around the Bay Area.

Judge Susan Illston denied Reilly's request for a TRO to stop MediaNews's ongoing consolidation of production and editing operations among its area papers -- but that didn't stop Alioto from crowing that the controversial and complex Hearst/MediaNews deal is going to fall apart.

Alioto and other local critics of the deal say the TRO hearing and order have found the quid pro quo behind what they characterize as Hearst's otherwise mysterious offer last summer to help a Bay Area competitor, MediaNews get even stronger. The alternative weekly Bay Guardian, which has been outspoken about the deal in print and in owner Bruce B. Brugmann's blog headlined its coverage of the TRO this way:

"Those lying newspaper barons -- Hearst, Singleton -- are nailed trying to wipe out competition."

In a series of transactions this summer triggered by Knight Ridder's decision to put itself up for sale, MediaNews bought outright the Mercury News and Contra Costa Times, while Hearst put up $263.2 million to buy the Monterey Herald in the Bay Area, and the St. Paul Pioneer Press in Minnesota. Hearst then transferred ownership to William Dean Singleton's MediaNews in exchange for a then-undisclosed equity stake -- revealed Tuesday by Illston to be 30% -- in MediaNews properties outside the Bay Area.

"This document was the knot that tied the whole transaction together, and when we cut this one, like the Gordian knot, the whole thing collapses like the house of cards," Alioto said. "It unravels the deal."

The document that Alioto and other local critics of the Hearst/MediaNews deal have seized upon is an April 26 letter from Hearst Senior Vice President James Asher to MediaNews President Jody Lodovic. Parts of the previously sealed letter were included in Illston's TRO ruling.

"The Hearst Corporation and MediaNews Group, Inc. agree that they shall negotiate in good faith agreements to offer national advertising and Internet advertising sales for their San Francisco Bay area newspapers on a joint basis, and to consolidate the San Francisco Bay area distribution networks of such newspapers," it reads in part. The letter goes on to detail an intention to use CareerBuilder.com as the Bay Area papers' Internet jobs site and Classified Ventures, with the two companies joining the networks on the same financial terms.

In her strongly worded opinion, Illston -- who in July rejected Reilly's previous attempt to get a TRO on the deal -- suggested she had been fooled by Hearst's and MediaNews's representations that Hearst entered the transaction simply because it wanted to a passive equity investor in MediaNews.

"Though defendants offered no explanation why Hearst was willing to help finance an acquisition that would only make its competition stronger, the Court did not understand that Hearst expected, or would later receive, any quid pro quo," Illston wrote. "However, the April 26 letter suggests, at the very least, that Hearst's investment was specifically tied to an agreement by MediaNews to limit its competition with Hearst in certain ways."

These kinds of agreements, she added," increase the likelihood that the transactions at issue here were anticompetitive, and illegal."

Alioto puts it even more strongly: "It's just a clandestine, secret price-fixing agreement, the effect of which is a straight-out monopoly on the Bay Area."

More important, he said, is that if Hearst cannot get its quid pro quo, it will pull out of the agreement -- taking its $263.2 million with it, and forcing MediaNews to come up with the money. Under the deal, MediaNews will get the Herald and Pioneer Press in any event, and will fold it into its California Newspaper Partnership with Gannett Inc. and Stephens Media.

"I mean, that's the story here: MediaNews has got a $260 million hole all of a sudden," said one local media observer, who insisted on anonymity.

Hearst, through a spokesman, said it would not comment on the ruling or transaction.

But MediaNews' Lodovic, in an interview Wednesday, said critics are reading way too much into the letter.

"If it truly was a quid pro quo for your investment, wouldn't you want more than a letter saying that you're willing to talk about (collaborating)?," he said.

Long before the Knight Ridder papers came up for sale, Lodovic notes, the Chronicle asked MediaNews if it might be interested in jointly printing the paper. "The fact of the matter is the Chronicle loses money, and they want to reduce their costs," he said. "It's only natural that they might look at that as one way to do it, but we told them, after looking into it, that we couldn't do it. That's a perfect example of the dialogue we have had or could have about (the Bay Area) papers."

The judge may be understandably suspicious of the publishers now, Lodovic added, but the fact is that the letter had previously been disclosed to the Antitrust Division of the U.S. Justice Department, "and they weren't troubled by it."

Since the time of the letter, MediaNews and Hearst have not discussed any collaboration, nor scheduled any meetings on it, Lodovic said. The TRO could become permanent after a hearing scheduled for Wednesday Dec. 6. But Lodovic indicated that if MediaNews formally opposes making it permanent, it would be for legal reasons to keep a clear record.

"But on the other hand, we don't care" if the companies are restrained from collaborating now, he added. "This won't impact our operations or strategic planning. It won't slow us down from anything we are doing."

And any suggestion that a restraint on collaboration will drive Hearst out of its investment deal, Lodovic says, is "grand-standing and speculating" that's not based on reality.

In an odd way, Reilly's attorney Alioto also believes it almost makes no difference whether the TRO becomes permanent. Because, he says, the deal will unravel in any case.

"And maybe now," he added, "we'll get somebody who will come in to this market to compete, so we have three or four competitors, and not this monopoly."