What we know now

Pub date February 6, 2007
WriterG.W. Schulz

› gwschulz@sfbg.com

Records unsealed in a federal civil suit last week show that the Hearst Corp. and MediaNews Group have grown intensely fond of each other during the past several years. Hearst even considered selling its San Francisco Chronicle to MediaNews in 2005, but CEO Dean Singleton wasn’t offering nearly enough money.

What the records don’t show is any effort by the two chains to compete in the market by improving their products.

The Guardian first posted a story online Jan. 31 detailing court documents unsealed by Federal Judge Susan Illston in real estate investor Clint Reilly’s antitrust suit against Hearst, MediaNews, and a group of other newspaper companies who joined Singleton in a Northern California partnership that has given him control of almost every big daily in the Bay Area except the Chronicle.

The evidence of anticompetitive behavior is so clear now that the obvious question is whether the US Justice Department or the California Attorney General’s Office, with new boss Jerry Brown, will do anything about it.

Gina Talamona, a Justice Department spokesperson in Washington, DC, confirmed that the feds were still looking into Hearst’s alliance with MediaNews, but she wouldn’t, of course, divulge details.

"I’m just confirming generally we’re looking at it, and we look at the anticompetitive effects of a proposed transaction, and that’s ongoing," Talamona said. "Obviously, our folks are aware of what’s going on in that private suit, but I wouldn’t have anything further for you on that."

Illston, meanwhile, has made it clear in the past that she could force MediaNews to give up some of its newly purchased properties if Reilly convinces her that the deal violates antitrust laws.

Among the documents we obtained is a deposition of Hearst senior vice president James Asher, taken by Justice Department lawyers last September, in which he candidly explains how Hearst for years has wanted to invest in MediaNews — which likes to buy up all the papers in a region and cut costs by sharing facilities and stories.

Hearst executives "formed a favorable impression of Dean Singleton and his company" all the way back in 1995, when a shady deal in Houston gave Hearst’s Houston Chronicle a dominant position in that market after MediaNews shuttered the Houston Post and sold its assets to Hearst. Since then, Asher stated, Hearst has quietly waited for an opportunity to invest in MediaNews or at least cut costs by joining ad, distribution, and printing operations with the ostensible competitors across the bay.

That opportunity arose when Hearst claims it was most needed.

Hearst spent three-quarters of a billion dollars buying the San Francisco Chronicle in 2000, a messy deal that nearly left its old property, the San Francisco Examiner, in shambles. But the purchase quickly became a drag on the company’s portfolio.

Hearst has since lost $330 million trying to figure out how to make the Chronicle profitable. Of all the documents reviewed by Guardian so far, which include memos between Hearst and MediaNews executives outlining potential collaborations, little time appears to have been spent determining how the product itself could actually be made more valuable to readers and, hence, more lucrative for both companies. Instead, Hearst seemed hungry to emulate Singleton or at least buy a bunch of his stock and let him handle the dirty work.

The infamous Singleton strategy includes clustering properties (its Bay Area cluster is now the company’s largest), slashing staff, outsourcing jobs, and consolidating business offices. Layoffs have already occurred at the San Jose Mercury News and the Contra Costa Times, and reporters are covering stories for several papers under a single "MediaNews Staff" byline.

While Hearst lawyers told Illston early in Reilly’s suit that its $300 million investment in MediaNews, consummated last summer, would involve only non–Bay Area properties to avoid conflicting interests, executives were telling another story behind the scenes.

"The proposed transaction is an opportunity to invest at a reasonable price in a company we have admired," Hearst president and CEO Victor Ganzi wrote to Hearst’s board of directors last July. "If we are able to convert the investment to common stock in all of MediaNews, we will be able to participate in the efficiencies MediaNews will achieve through the consolidation of the Bay Area newspapers other than the San Francisco Chronicle. Whether or not we are able to convert our investment, the proposed transaction provides additional impetus for lawful cooperation between the San Francisco Chronicle and the Bay Area newspapers, which will be owned or controlled by MediaNews, in areas such as distribution, national advertising and the Internet."

Several hundred pages of records were originally filed under seal in Reilly’s suit, but the Guardian, along with the East Bay nonprofit Media Alliance, intervened to have the filings opened to public access. Attorneys Jim Wheaton, David Green, and Pondra Perkins of the First Amendment Project did the legal work.

Illston agreed with our request and made most of the records available in an order last month. Reilly’s suit is expected to go to trial in the spring. He’s alleging that Hearst, MediaNews, and its other business partners, including the Stephens Group and Gannett Co., conspired to divide and monopolize the Bay Area newspaper market.

At the very least, Asher admitted in his deposition that Hearst saw media consolidation as one of the few reasons to bother staying in the newspaper biz. Originally, Hearst executives were considering a $500 million investment in MediaNews, but that amount was eventually lowered.

"We’re among the larger owners and operators of newspapers," Asher stated. "We still believe in them, notwithstanding their challenges, and we would like to participate in that consolidation. And, in fact, if we don’t choose to, we should probably think about exiting the business." *