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Thursday, July 27, 2000

Judge clears way
for Hearst to buy
San Francisco

But he says the sale of the
Examiner to Ted Fang may
break antitrust law

By Jessie Seyfer
Associated Press


SAN FRANCISCO (AP) -- A federal judge ruled Thursday he would not block the sale of the San Francisco Chronicle to the Hearst Corp., clearing the way for Hearst to sell its San Francisco Examiner to a local newspaper mogul.

U.S. District Court Judge Vaughn Walker ruled that antitrust laws would not be broken in Hearst's $660 million purchase of the Chronicle.

Walker wrote that the deal "would not create a monopoly, substantially lessen competition or unreasonably restrain trade." The judge rejected a claim by local real estate millionaire Clint Reilly that the deal would threaten newspaper competition in the city.

With the purchase, Hearst has agreed to give the Examiner to local publisher Ted Fang, thus ending a so-called joint-operating agreement the two newspapers shared dating to 1965.

In addition, Walker said that Hearst's move to give the Examiner away to stave off antitrust allegations is unnecessary. There is no legal obligation, Walker wrote, "to spin off some of the JOA's assets to a third party for purposes of establishing competition."

Star-Bulletin closing (The case is being watched closely by the media industry in Honolulu, where a lawsuit by the state and a citizens' group put the planned shutdown of the Star-Bulletin on hold. Liberty Newspapers L.P., the Star-Bulletin's owner, planned to close the afternoon paper last Oct. 30 in exchange for $26.5 million from Gannett Co., the owner of the Honolulu Advertiser. The two companies would have ended their JOA, which was due to expire in 2012.

But the State of Hawaii and a group called Save Our Star-Bulletin sued, claiming that the shutdown agreement violated federal antitrust laws and would leave Gannett with a monopoly in the local news market.

Federal Judge Alan Kay filed a temporary injunction against the shutdown and set a September trial date. However, Liberty Newspaper agreed to put the Star-Bulletin up for sale. If a buyer is not found, the lawsuit will proceed, according to a deal among the parties of the dispute.)

Hearst announced its purchase of the Chronicle, the second-largest newspaper in California and 12th largest in the nation, in August 1999. Hearst said it would sell or close the Examiner, one of the largest remaining afternoon papers, after 120 years of Hearst ownership.

Hearst said its agents later contacted more than 80 prospective buyers, including the nation's leading publishers, and found no one willing to pay for the money-losing Examiner.

After months of civic pressure to keep the Examiner alive, Hearst agreed to pay Fang, publisher of the Independent newspaper and Asian Week, a $66 million subsidy over three years if he assumed ownership.

The judge said Thursday that giving the Examiner to the Fang family with the $66 million subsidy "could constitute a violation of the antitrust laws."

The judge's wording appeared to raise the question of whether Hearst has to follow through with its deal to sell the Examiner to the Fangs and give them the subsidy.

Fang attorney David Balabanian said that he expects the Hearst Corp. to honor its deal with the Fangs.

"It is a contract they are obliged to honor. They are bound. This means the Fangs will make good on their promise to keep the Examiner alive and make it a strong and vital force in our city," he said.

He declined to speculate on the legal ramifications if Hearst backed out.

Hearst attorney Gary Halling would not say whether the media giant would honor the agreement with the Fangs.

"We're studying his decision," he said. "We're not prepared to commit one way or the other on that point."

He declined to elaborate.

The U.S. Justice Department found no antitrust violations in the sale and approved the dissolution of the JOA.

But Reilly, a real estate investor and former mayoral candidate who lost his bid for the Examiner, sued to stop the sale. He contended the transaction was a sham, designed to fail quickly and leave San Francisco with only one newspaper after more than a century of competition.

The judge ruled Thursday that Reilly did not have legal standing to allege that the Hearst deal jeopardized competition in the city.

"In order to challenge the ... transaction on the basis of possible anti-competitive effects, a plaintiff would need standing as an advertiser in, or competitor to Hearst or Fang group publications, or both," Walker wrote.

Reilly spokesman Paul Shinoff said he would not discuss whether Reilly planned to appeal, but said Reilly's reaction to the judge's ruling was mixed.

"Clint Reilly is clearly disappointed in the outcome but at the same time feels vindicated in bringing the case," Shinoff said. "The lawsuit was a major public service in that it revealed the rather disturbing activities on the part of the newspapers and their representatives and revealed the anti-competitive nature of the JOA in San Francisco."

The judge expressed serious suspicions that the Department of Justice had been influenced by political "cronyism."

"The court is deeply troubled by the DOJ's role in this case. Both of the DOJ's key positions, that the Hearst-Chronicle merger created antitrust concerns, are unsupported by legal analysis and inconsistent with the evidence," he said. "The cronyism that fueled the Fang transaction at the local level exerted influence over the DOJ investigation."

Chronicle Publisher John Sias said the Chronicle Publishing Corp. was "thrilled" with Walker's decision.

"It means we intend to close the sale at a very, very early date," he said. "It's our intent to close very expeditiously."

Reporters gathered in both the Examiner and Chronicle newsrooms as the decision, posted on a web site, broke.

"This means we can now get on with the job of building a bigger, better Chronicle that's much more competitive and better for our readers," said Chronicle Executive Editor Matt Wilson.

The next step will be to talk with Hearst officials to plan the merging of the two news staffs, Wilson said.

"It will take some weeks and months to do that," he said. "We have a lot of ideas but no plans. We'll certainly follow the new owners' lead. And Hearst is the new owner."

The mood at the Examiner was upbeat, according to Examiner Executive Editor Phil Bronstein, who said Walker's decision was a relief.

"I'm one of those people who's been waiting to see what's going to happen," he said. "We've all been affected by it. I feel, as most people do, that we're happy that this particular phase appears to be over.

"If both acquisitions go through, there will be two newspapers in San Francisco, from what I understand of the Fangs' plans. But there are many newspapers in San Francisco already."

All three publishers -- Hearst, Chronicle Publishing and Fang's company, ExIn LLC, owner of a free local newspaper chain and prospective publisher of the Examiner -- have denied the charge, saying their transactions will promote competition, not destroy it.

But on March 30, a day before the sale was to be completed, Judge Walker stunned the publishers by issuing a restraining order. He said the purpose of the federal law that authorized the JOA -- to keep foundering newspapers afloat -- would not be served if the transactions that ended the JOA were designed to let only one paper survive.

The trial opened May 1, and in the two weeks that followed, the most riveting and controversial testimony came from the first witness.

Tim White, the Examiner's publisher, shocked the courtroom when he revealed that at a lunch meeting in August 1999, weeks after the purchase of the Chronicle had been announced, he offered Mayor Willie Brown favorable treatment in editorials if Brown would support the deal.

Brown initially was outspoken against Hearst's plans, urging the White House and Justice Department to block the Chronicle sale until Hearst found a buyer for the Examiner. In the months after his Aug. 30 lunch meeting with White, Brown worked behind the scenes to support the Examiner sale to the Fang family, even negotiating for a bigger Hearst subsidy.

White's email to the head of Hearst's newspaper, read in open court, said: "I asked Willie how I was going to justify to my superiors in New York wanting to support him and cooperate with him when he was seeming to go out of his way to make our lives difficult."

Hours later, White recanted his testimony, saying he misspoke.

"I was tired and confused by the question," White said in a statement distributed by Hearst Corp. "The implication of my answer that the pages of The Examiner can be influenced, under any circumstances, is absurd."

Hearst issued a statement also denying any favorable treatment had been offered: "It is not now -- nor has it ever been -- a policy of the San Francisco Examiner to trade favorable editorial coverage for any gains, including political influence."

Other key testimony and court records showed that the 1965 joint operating agreement that allows the Chronicle and Examiner to control 98 percent of the city's daily newspaper market and protects them from federal laws against monopolies also left the Chronicle shouldering a much bigger financial burden.

While the Examiner and Chronicle split the profits, they have paid their own costs for running fiercely independent newsrooms. The Examiner, which publishes most of the joint Sunday edition, employs 208 full-time editorial workers, while the Chronicle employs roughly twice that number.

As a result, the Examiner, with less than a fourth of the circulation of the Chronicle's 464,943 readers, pockets more money because it spends less to put out a paper for its 101,630 readers. Estimates drawn from disclosures made during the trial show the Examiner's 1999 operating profit was about $31 million, compared with about $14 million for the family-owned Chronicle.

The JOA has been on shaky ground for the last few years, and the Chronicle, discouraged from investing to improve the morning paper, notified Hearst several years ago that it intended to dissolve the contract when it expired in 2005.

Hearst CEO Frank Bennack Jr. testified that ending the JOA would enable the company to improve the coverage of the Chronicle by investing more money than its current owners. Estimates presented at trial show Hearst stands to generate an additional $20 million in operating profits by taking over the Chronicle and jettisoning the JOA.

Reilly had argued in court papers that Hearst used the joint operating agreement to exclude other potential buyers of the Chronicle, who would have had to assume the larger paper's JOA obligation to split profits with the Examiner through 2005.

He also said he offered to take over the Examiner if he got a $200 million subsidy over six years -- $50 million less than the amount needed for a competitive newspaper, according to experts he consulted.

As further evidence that the transfer to Fang was designed to fail, Reilly said Hearst has offered Fang and his family a $10 million bonus if they reduce subsidized spending on the Examiner by $20 million in the last two years of their agreement.

Hearst argued that the fate of the Examiner is legally irrelevant to its purchase of the Chronicle.

The Fang family, which has revived eight failed newspapers and argues it can do the same with the Examiner, have said they plan to improve competition by, among other things, switching to morning publication, offering ads at less than one-tenth the cost of the Chronicle's and making other technological improvements.

Ted Fang also said the new Examiner would be "much more traditional" than the Independent, apparently in response to critics of the advocacy journalism of the Independent, which sometimes uses its news pages to advocate for candidates during political campaigns.

Walker's ruling could end the sagas of two newspapers that have been steeped in drama since they got off the ground on the heels of the Gold Rush.

The Examiner began with a card game in 1880, when mining, real estate and ranching millionaire George Hearst got the then-unprofitable, 5,000-circulation Examiner as partial payment on a gambling debt. Seven years later, his son William Randolph Hearst took over "our miserable little sheet." Bankrolled by his father, s father, the younger Hearst sent correspondents to Asia, Mexico and Europe and recruited Jack London and Mark Twain to write for him.

Meanwhile, the Daily Dramatic Chronicle was founded by the de Young brothers, Michael and Charles with a $20 gold piece they borrowed from Michael's landlord. Writing florid prose and carrying pistols for protection, they took on scoundrels of all types and became the dominant paper among more than 100 in the frontier city.

One of the de Young's granddaughter's, Nan Tucker McEvoy, rejected a Hearst Corp. offer of $800 million in 1993 for Chronicle Publishing, which included other newspapers, TV stations and book publishing companies. A year later the last descendant of the de Youngs was ousted from management among bitter infighting among family members.

This year, the potential for a huge payout outweighed the family's sentimental ties to their media company.

Judge Walker's ruling (PDF format)

Bulletin closing archive

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