Can't Trust It: Judge Blocks Hearst-Media News Agreement

After allowing a complex newspaper deal to proceed, a Federal judge is blocking the major players from cooperating in national advertising and Internet ad sales, saying their plans could violate anti-trust laws. The ruling affects The San Francisco Chronicle, owned by the Hearst Corporation, and a number of newspapers purchased by the MediaNews Group in a Byzantine deal earlier this year.

In the thwarted deal, $300 million of financing was provided by Hearst--supposedly as a "passive partner." Hearst would hold a minority stake in the new partnership, along with other newspaper holding companies, like Gannett. U.S. District Judge Susan Illston permitted the deal to go forward because Hearst's participation was ostensibly limited to investment. At the time, Hearst's participation raised eyebrows, since it seemed to help the company's major competitor gain ground in the Bay Area market.

Yet even without an active interest by Hearst, the MediaNews purchase raised concerns of a media monopoly in the Bay Area, as it now controlled papers with a total daily circulation of about 800,000.

In April, the Denver-based MediaNews Group bought the Monterey County Herald, San Jose Mercury News and Contra Costa Times from the McClatchy Company. McClatchy had just acquired the papers in its buyout of Knight Ridder, which it was busy dismantling, selling off less profitable or non-core properties. MediaNews also owns the Oakland Tribune, Daily Review in Hayward, San Mateo County Times, Fremont Argus, Alameda Times-Star and the Tri-Valley Herald, as well as the free Daily News.

Now Judge Illston has reversed course, issuing a temporary restraining order on the basis of a previously undisclosed letter from Hearst Senior Vice President James Asher to Joseph Lodovic, the president of MediaNews, that agrees to negotiate terms for possible cooperation in national advertising and Internet ad sales. Although neither side has acted on the agreement, Judge Illston said its very existence casts suspicion on the earlier deal transferring ownership, suggesting that there was intent to violate anti-trust laws all along.

The judge's decision is a setback for Hearst and especially the San Francisco Chronicle, which stands out in a troubled industry for its rapid decline. In the last FAS-FAX report from the Audit Bureau of Circulations, covering March-September 2006, the Chronicle saw Sunday circulation decline 6.7%, while weekly circ fell 5.7%, compared to the same period a year ago.

These drops are small, however, compared to the ABC report covering the previous six months, when Sunday circulation fell 13% and weekly circulation fell 18.5%. Combining the two reports, over the last two years, Sunday Chronicle circulation has plummeted 18% and weekly circulation has fallen 6%.

The MediaNews Group bought the three California papers, as well as the St. Paul Pioneer Press in Minnesota for about $1 billion.