McClatchy sale in hands of U.S. judge

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Jul. 28--SAN FRANCISCO -- A judge indicated Thursday she was leaning toward allowing The McClatchy Co.'s $1 billion newspaper sale, but the deal will remain in limbo for at least another day.

U.S. District Judge Susan Illston said she would rule late Thursday or today on San Francisco politico Clint Reilly's plea for a temporary restraining order, which would prevent Sacramento-based McClatchy from closing the sale of its Bay Area newspapers for at least 10 days. Illston said it was her "preliminary view" that she would reject Reilly's request.

Meanwhile, another day passed with no word from the U.S. Justice Department on whether the sale should go through. The department has been examining the issue for three months and is expected to rule any time.

McClatchy, which owns The Bee, is selling the San Jose Mercury News, Contra Costa Times, Monterey County Herald and a St. Paul, Minn., paper to MediaNews Group Inc., which already owns seven Bay Area dailies.

In a federal courtroom here Thursday, Reilly attorney Joseph Alioto argued that the deal would give Denver-based MediaNews a virtual monopoly on Bay Area newspapers.

Alioto noted that MediaNews' purchase is being partly financed by Hearst Corp., owner of the San Francisco Chronicle -- the only major Bay Area daily that wouldn't be controlled by MediaNews. This arrangement would wipe out what little competition is left, he said, adding that there is probably "an understanding" among the parties that the Chronicle wouldn't invade MediaNews' turf and vice versa.

Asking that the deal be held up for 10 days, he told the judge: "Once it's done, it'll be done and there will be one company controlling the Bay Area with the cooperation, assistance, financing ... from Hearst."

But lawyers for MediaNews and Hearst dismissed Alioto's claims as fantasy. "He's analyzing it largely as a conspiracy," said MediaNews lawyer Alan Marx.

McClatchy expected to close the sale a month ago, the same time it finished its epic takeover of Knight Ridder Inc. McClatchy was counting on the $1 billion to help pay for the takeover, but now it remains in legal limbo.

The sale can't close without the go-ahead from the U.S. Justice Department or, because of the Reilly suit, Judge Illston. McClatchy is not a defendant in the Reilly suit but was granted permission to participate in the case.

McClatchy paid $4 billion, plus $2 billion in debt assumption, for Knight Ridder. It decided to sell 12 of Knight Ridder's dailies, including the four papers subject to Reilly's suit, mostly because they serve slow-growth markets or are less profitable than others.

In court papers, McClatchy Chief Financial Officer Pat Talamantes said McClatchy is paying an additional $163,000 a day in interest on the $1 billion. The cost is being "roughly offset" by the cash flow from the four papers, Chairman and Chief Executive Gary Pruitt said.

Alioto had little sympathy for McClatchy on Thursday, saying the publisher should simply sell the papers to someone else. "You can't get your $1 billion if you're going to close the market around San Francisco forever," he told the court.

MediaNews said its borrowing costs could escalate if the sale is delayed, but Alioto said that's unlikely and argued that the lenders should be brought into court to verify that claim.

Alioto would not say what Reilly's next step would be if the judge failed to grant the restraining order. He could still seek a full trial on the issue.

Illston said the case raises significant antitrust questions, but she didn't see "that there is imminent irreparable harm" if she let the deal go through. A plaintiff such as Reilly must demonstrate irreparable harm in order to win a temporary restraining order.

Yet the judge warned that if the deal is completed, and Reilly won his lawsuit, she could order that the deal be reversed. "It's clear that one remedy that would be available ... is to say, 'Go back to where you were,' " she said.

In an interview Thursday, McClatchy's Pruitt said he thinks "it would be extremely unlikely" for the judge to reverse the sale.

The sale, announced April 26, calls for McClatchy to sell papers in San Jose and Contra Costa to a partnership led by MediaNews for $736.8 million and the St. Paul and Monterey newspapers to Hearst for $263.2 million.

Hearst would then transfer its two papers to Media News; in return, it would get equity in MediaNews papers outside the Bay Area. Bottom line: McClatchy would sell the four papers to MediaNews for $1 billion, with Hearst providing some of the financing.

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