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SAN JOSE, Calif. - The announcement this week that MediaNews would acquire the San Jose Mercury News and three newspapers from McClatchy was among the industry's worst kept secrets. But word that Hearst, which owns the rival San Francisco Chronicle, would be involved in the deal caught most observers off guard and raised more than a few eyebrows.
Rather than the exception, however, such deals have become the standard way of doing business in a newspaper industry that seems to be fighting to keep its head above water. Newspapers face circulation declines and advertising growth has become more difficult in the Internet era. Wall Street, meanwhile, has been pummeling newspaper companies - Knight Ridder was forced to sell at the behest of dissident shareholders.
In the clubby world of media companies, the companies that publish newspapers have entered into a dizzying array of joint ventures and partnerships that allow them to invest in each other and share resources such as printing presses, advertising staffs and human resources functions.
It's a far cry from the days of newspaper wars such as the San Francisco Chronicle vs. the Examiner or the Detroit Free Press vs. the Detroit News, where the goal was to be first and grab people's attention and quash the competition. Those newspapers eventually entered into joint operating agreements that allowed them to maintain separate news operations while sharing business costs and profits.
The type of deal that led to the Mercury News sale represents the latest twist on the trend. And perhaps no media company epitomizes this business strategy more than privately held MediaNews of Denver. The transaction announced this week that includes the Mercury News involves six separate media companies either buying, selling or investing in each other's businesses.
"As I go to investor meetings, they're always greeting each other warmly," said Rick Edmonds, a research fellow at the Poynter Institute for Media Studies. "It's not like Coke and Pepsi where they're all locked in fierce battle with each other. They're really by and large operating in their own territories. And there's a comfort level having people who know the business running the business. There's rarely an unfriendly takeover in the business."
MediaNews Vice Chairman and Chief Executive Dean Singleton said as much on Wednesday when he addressed the Mercury News staff for the first time.
"Hearst, a company we've worked with for many years, will be buying a minority piece of certain MediaNews operations outside the Bay Area," Singleton said. "We have tended to use newspaper companies for minority equity because they understand our business very well."
Under the complex arrangement, McClatchy will get $1 billion for four newspapers: the Mercury News, the Contra Costa Times, the Monterey Herald, and the St. Paul Pioneer Press. But MediaNews is only buying the first two directly from McClatchy, for an undisclosed sum. Partly for tax reasons, Hearst is buying the other two newspapers and giving them to MediaNews in exchange for unspecified ownership stake in MediaNews' papers outside California.
The three Bay Area papers will then be folded into the California Newspaper Partnership, a joint venture MediaNews controls that also includes Gannett and Stephens Media. Those two must ante up cash for their share of the papers. With these three other media companies contributing various amounts of cash, as a result, Singleton said he wouldn't have to raise much debt to finance the deal.
Singleton also said that using such partnerships allows him to raise money without turning to public markets or Wall Street for help, noting that he watched in dismay as investors forced Knight Ridder to dismantle itself.
"We don't deal with Wall Street," Singleton said.
Such arrangements have become the norm throughout the industry:
-MediaNews has several partnerships with Gannett, including one involving Texas and New Mexico newspapers. Another involves the Detroit News, which the companies acquired from Gannett last year.
-Earlier this year, MediaNews announced a new partnership with Scripps in eastern Colorado.
-Four of the papers owned by MediaNews operate under joint operating agreements, which allow two newspapers to combine business functions while running separate newsrooms.
-Knight Ridder, Gannett and Tribune jointly owned CareerBuilder, an online job site.
These arrangements may be more common, but not everyone's happy about it.
Stephen Barnett, a law professor emeritus at the University of California-Berkeley who specializes in newspaper antitrust issues, said MediaNews' extensive use of partnerships eventually could be a concern to antitrust regulators.
"What I do find of antitrust concern is the wrinkle that creates a link between Hearst and MediaNews," Barnett said. "It seems like we'll soon be at the point where one publisher owns everything. It becomes a many-tentacled monster."
MediaNews must receive approval from the U.S. Department of Justice and the California Attorney General's office before it can legally take control of the Mercury News, the Contra Costa Times and the Monterey County Herald.
California Attorney General Bill Lockyer already has announced he intends to probe the deal to see whether it will create any anti-competitive issues for advertisers or readers.
Singleton insisted this week that the arrangement with Hearst would not affect competition in the Bay Area with the Chronicle, a paper he termed "the enemy" when speaking to Mercury News staff.
Chronicle Editor Phil Bronstein echoed that sentiment.
"I feel like our mission as a newsroom is going to be the same," he said. "As for the rest of it, it was decision made by the Heart Corporation."
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(c) 2006, San Jose Mercury News (San Jose, Calif.). Distributed by Knight Ridder/Tribune News Service.
