Ken Garcia: Smelly deal makes mockery of journalistic competition 

Most people would probably agree that if you were financing a deal for your fiercest business rival to expand its empire, that the word "competition" wouldn’t have much meaning.

But when you’re losing $1 million or so a week, concessions have to be made, even if it means tying the final noose knot that your "rival" hung around your neck. Desperation doesn’t allow for much pretense.

That describes the state of the two largest newspaper companies in the Bay Area, whose financial feints were exposed by a federal judge this week, making their future partnership at best uncertain.

That’s a good thing for readers of newspapers who benefit from spirited journalistic dueling. But the desire for profit among media owners is stronger than ever these days, and this battle will not end without a mighty legal fight.

The companies, Denver-based MediaNews and the Hearst. Corp. in New York, were whacked in court over their plan to jointly sell advertising and distribution of their newspapers — including the San Jose Mercury News, the San Francisco Chronicle and the Contra Costa Times — while attempting to suggest that they were still locked in competition. It was a deal that the (blind) Justice Department essentially blessed in September, only to have U.S. District Judge Susan Illston this week characterize it as more of an unholy alliance.

First a quick snapshot. MediaNews earlier this year purchased the Mercury News, the Contra Costa Times, the Monterey Herald and the St. Paul (Minn.) Pioneer Press for $1 billion, with $300 million in financing from Hearst in exchange for a stake in MediaNews]’ "non-Bay Area newspapers." Local politico and real estate magnate Clint Reilly sued to block the deal, saying it would create a virtual monopoly on daily newspapers in the region.

The Hearst Corp. should be used to this by now, since Reilly filed a lawsuit to block the former Hearst-owned Examiner from taking over the San Francisco Chronicle eight years ago, a deal that ultimately led to the creation of this newspaper and made multimillionaires of its previous owners. Hearst’s lawyers completely bungled that case, causing them to seriously overpay for the Chronicle, which has lost hundreds of millions of dollars since its new owners took over the once-mighty Voice of the West.

In order to stem the flow of red ink, Hearst cut the deal with MediaNews, which now has newspaper properties surrounding the San Francisco daily. But the financial agreement the companies insisted allowed them to remain "strong competitors" appears to be a euphemism for corporate cronyism.

In two letters unearthed by Reilly’s legal team, Judge Ilston found enough evidence to issue a temporary restraining order barring the companies from acting on their proposal to pool considerable portions of their business operations. Illston, who earlier denied Reilly’s request to issue an order blocking the purchase of the newspapers, indicated in a sharply worded ruling that the new correspondence — in which they agreed to discuss offering national advertisers a way to buy ads in both companies’ local newspapers — might have led her to a different conclusion.

One letter, which stated that the companies will work to "consolidate the San Francisco Bay Area distribution networks of such newspapers,"seems to violate the trust in antitrust law. Ilston said "the parties have engaged in more than just an abstract agreement to negotiate at some later date."

"Such agreements would alter the court’s analysis of this case as a whole," Illston wrote, "and increase the likelihood that the transactions at issue here were anti-competitive, and illegal.

"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" for its assistance to MediaNews in acquiring its Bay Area papers.

Lawyers for the two companies have until Wednesday to persuade the judge not to issue a preliminary injunction barring any business collaboration until Reilly’s trial begins in April.

Collusion and obfuscation are things newspapers are supposed to bring to light — except, apparently, when it doesn’t serve their financial interests. Lawyers for the companies have requested that many of the court documents remain sealed.

Give the companies credit for not being afraid to pull the trigger. Next time, though, they may want to see which way the barrel is pointed.

Ken Garcia’s column appears Tuesdays, Thursdays and weekends in The Examiner. E-mail him at kgarcia@examiner.com or call him at (415) 359-2663.

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