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Judge Clears Hearst Purchase in SF

July 27, 2000

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 the rival San Francisco Examiner to a local newspaper mogul.

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

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

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 contacted more than 80 prospective buyers 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 Ted Fang, publisher of the Independent newspaper and Asian Week, a $66 million subsidy over three years if he assumed ownership.

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

Clint 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.

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, the judge stunned the publishers by issuing a restraining order. Walker 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, 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, which was 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 testimony and court records showed that the Chronicle has shouldered a much bigger financial burden under the 1965 joint operating agreement.

While the Examiner and Chronicle split profits, they have paid their own costs for running independent newsrooms. The Examiner 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 Chronicle 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.

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