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Tuesday, May 2, 2000

Star-Bulletin closing

Hearst defends plan
to buy S.F. paper

Its lawyers deny charges that
terms of the deal to sell the
Examiner to the Fang
family are a 'sham'

From staff and wire reports


SAN FRANCISCO -- Lawyers battling over Hearst Corp.'s $660 million bid to purchase the San Francisco Chronicle are in federal court this week, launching a case that promises to affect the future of the city's media market and newspaper competition around the country.

Hearst plans to take over the Chronicle -- which for more than a century has been the main competition to its own San Francisco Examiner -- and sell the struggling Examiner to a local publishing company complete with $66 million in subsidies to keep the newspaper afloat.

But in opening arguments yesterday, lawyers opposed to the deal called it a sham and charged that the Examiner's new owners, the Fang family, will shut the 135-year-old newspaper down in order to leave Hearst with a monopoly in the lucrative San Francisco newspaper market.

Associated Press
Unsuccessful Examiner bidder Clint Reilly, left, with
his wife Janet, walks out of the Federal Building in
San Francisco yesterday during a lunch break on the
first day of the trial of his lawsuit against the Hearst Corp.

"We've described it as a sham. It certainly is that," said attorney Joseph Alioto, who represents former mayoral candidate Clint Reilly in his legal challenge to the sale. "Antitrust laws can and will be violated unless the Hearst Corp. is prevented from acquiring the Chronicle," Alioto added.

Reilly, who made his own unsuccessful bid to buy the Examiner, hopes to prove that Hearst and the Fangs have entered what amounts to a sweetheart deal that ignores real ways to save the newspaper as a truly independent editorial voice for San Francisco.

Hearst and the Fangs, for their part, say their agreement is the only way to keep the Examiner afloat and accuse Reilly of waging the court battle to seek political revenge for his failed 1999 mayoral bid.

In their opening statements yesterday, Hearst's lawyers said the end of the 40-year-old joint operating agreement between the two newspapers in 2005 left the New York-based media conglomerate with no choice but to sell the Examiner, an afternoon paper whose daily circulation of 110,000 is dwarfed by the morning Chronicle's 465,000.

"No facts are in dispute in this case," the company's lead lawyer, Gary Halling, said. "Everyone in this case agrees that the Examiner is a failing business, that it is not viable as currently constituted."

But U.S. District Judge Vaughn Walker appeared skeptical. The judge, who issued a restraining order March 30 blocking the Chronicle sale, pointed out that Hearst joined federal regulators in predicting a revival of the Examiner when the Justice Department approved the transactions earlier the same day.

"You've had several positions," Walker told Halling, pointing out the apparent contradiction. "One is bound to be right."

The case is being closely watched in San Francisco, where the Chronicle and the Examiner have co-existed since 1965 under the joint operating agreement, which allows them to share operating costs and profits but maintain separate news operations.

The case is seen as an important test of the joint operating agreement principle, an exception to anti-trust law meant to keep potentially failing newspapers alive to maintain editorial diversity, and could affect the future of similar agreements covering papers operating in at least 11 other U.S. cities, including Honolulu.

Stephen Barnett, a law professor at the University of California at Berkeley who observed yesterday's court proceedings, noted that "the judge seemed concerned that even if the Fang family establishes a new newspaper it won't be the same kind of metropolitan voice that the Examiner had under the JOA."

"Some of his questions sounded as though he was concerned about an early termination of the JOA," Barnett said.

But while the judge appeared to take an "aggressive" approach toward preserving two-newspaper competition in San Francisco, Barnett said he doubts the court has the authority to force continuance of a joint operating agreement.

The case is also being watched in Honolulu, where a planned shutdown of the Star-Bulletin has been put on hold by a federal court's intervention.

The Star-Bulletin's owner, Liberty Newspapers LP, announced in September that it was closing the afternoon paper on Oct. 30, 1999. Gannett Co., which owns the Honolulu Advertiser, had agreed to pay Liberty $26.5 million in return for closing the Star-Bulletin and ending their joint operating agreement, which was scheduled to end in 2012.

Judge Alan Kay ordered a preliminary injunction to halt the closure after arguments by the state and a citizens' group that the shutdown deal violates antitrust laws and would leave Gannett with a monopoly in the local newspaper market.

Last month, all parties in the case agreed on a plan that puts the Star-Bulletin up for sale outside the joint operating agreement. If a buyer isn't found, the court case to block the paper's closure will proceed, according to the plan.

Barnett said yesterday he was surprised government attorneys in Hawaii agreed to terms of the sale that exclude participation in a joint operating agreement. The terms may make it hard to find a buyer while weakening the state's anti-trust case, he said.

The first witness called in the San Francisco case yesterday was Examiner Publisher Timothy White, who testified that he offered Mayor Willie Brown "more favorable treatment" in editorials if Brown would support Hearst's purchase of the Chronicle. Hours after his testimony, White said he had misspoke on the witness stand. "I was tired and confused by the question," White said in a statement distributed by Hearst. "The implication of my answer that the pages of The Examiner can be influenced, under any circumstances, is absurd."

The trial is expected to last up to two weeks.


Reuters news service, the Associated Press and Star-Bulletin reporter Peter Wagner contributed to this report.

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