Deal Set for Three Bay Area Papers

William Dean Singleton will acquire three California papers and one in Minnesota being sold by McClatchy Co. in a $1-billion deal that will dramatically expand his company’s presence in the Bay Area and cement his position as the Golden State’s biggest daily newspaper publisher.

McClatchy said Wednesday that it would sell the San Jose Mercury News and Contra Costa Times to Singleton’s privately held MediaNews Group Inc., and the Monterey County Herald and St. Paul, Minn., Pioneer Press to Hearst Corp., publisher of the San Francisco Chronicle and Singleton’s biggest remaining Bay Area competitor.

Hearst, in turn, would then give those papers to Singleton in exchange for an undisclosed stake in MediaNews’ holdings outside the San Francisco area.

Denver-based MediaNews already owns nine Bay Area papers, including the Oakland Tribune and the Fremont Argus. If approved by regulators, the deal would more than double MediaNews’ daily circulation in the area to about 730,000 papers. The Chronicle sells about 420,000 papers a day.

The proposed deal, the result of three weeks of intensive negotiations, has two of the 54-year-old Singleton’s hallmarks. It allows him to save money by combining resources at newspapers that are close to each other, and it has the potential to soften the competition from a well-financed neighbor.

Singleton, known for cutting staff to improve the bottom line, said Wednesday that he had no immediate plans to eliminate jobs at the papers.

“There is certainly nothing in the works today to do that, but if there are consolidation opportunities that make sense, I’m sure that local management will look at them,” Singleton said.

In an upbeat speech to Mercury News staffers, he described the paper as the crown jewel in a chain that was itself “the crown jewel of the newspaper industry,” referring to Knight Ridder Inc.

The deal is the first by Sacramento-based McClatchy since it announced March 13 that it planned to buy San Jose-based Knight Ridder and sell 12 of Knight Ridder’s 32 papers to pay down the debt. The stock and cash deal for the nation’s second-largest newspaper chain in terms of circulation is now valued at around $4.3 billion, not including $2 billion in assumed debt.

McClatchy said it would net $700 million from the Singleton deal after taxes.

“We made this deal because it offered the opportunity to achieve a good price and a timely deal, and it represents a big step toward achieving certainty for these papers and for McClatchy and its shareholders,” Chief Executive Gary Pruitt said.

The price “proves there’s life for the newspaper business,” said analyst Edward Atorino of Benchmark Co.

It also could stop the long slide in newspaper stocks, which have fallen as the industry struggles with stagnant circulation and declining ad sales.

“It’s a positive signal,” said John Miller, a money manger at Ariel Capital Management, one of McClatchy’s largest shareholders.

The sale of the four papers is a blow to local groups that wanted to bid on the Monterey and St. Paul papers, and to a joint effort by a newspaper employees’ union and Los Angeles investor Ron Burkle to buy all 12 papers.

Among the papers still up for grabs are Knight Ridder’s largest, the Philadelphia Inquirer, and papers in Duluth, Minn., and Akron, Ohio. With five bidders interested in the Inquirer, it’s possible that Burkle’s Yucaipa Cos. will end up with none of the publications, according to people with knowledge of the talks. Officials at Yucaipa didn’t return calls seeking comment.

Many at the unionized Mercury News were rooting for Burkle, but employees said they would be nervous no matter who won the bidding.

“I’m certainly worried about the future,” business writer Matt Marshall said. “I actually am thinking about leaving.”

Jack Fisher, a Mercury News arts writer and union official, said he and his colleagues thought Singleton “was going to own everything but the Chronicle, and at the end he’s got [Hearst] involved as well. They were the leading candidate to bring an antitrust complaint, and now they’re on board with him.”

The Justice Department and California Atty. Gen. Bill Lockyer are reviewing McClatchy’s original deal with Knight Ridder. McClatchy said Wednesday that the Justice Department had requested additional information about its acquisition of the St. Paul newspaper. Although the company said concerns about that deal become moot with the sale of the Pioneer Press to Hearst, the request extends the time the Justice Department can take before deciding whether to oppose the deal.

Any concerns about anti-competitive forces in the Bay Area would have to be resolved by MediaNews, McClatchy officials said.

Singleton said that the Chronicle would remain in competition with his papers, but experts said it was unclear how the Justice Department would view the unusual transaction. The deal would allow, in effect, a measure of common interest between two companies that compete fiercely in the Bay Area, particularly for advertisers. If regulators block that part of the deal, MediaNews said it would simply buy the Monterey and St. Paul papers from Hearst.

A contract removing Hearst from control of MediaNews’ Bay Area papers would not necessarily eliminate concerns about the two colluding to restrain competition, said Stephen R. Barnett, an emeritus professor at UC Berkeley’s Boalt Hall School of Law.

“The two companies are still in bed together economically, regardless of the structure,” said Barnett, an expert on newspaper antitrust issues.

MediaNews has struck similar deals with rivals such as the former parent of the Los Angeles Times, which secretly lent Singleton’s company $50 million to help him buy San Fernando Valley’s Daily News.

And MediaNews is making its latest California acquisitions as part of its partnership with Gannett Co., the nation’s biggest newspaper chain, and Stephens Media Group, which owns the Las Vegas Review-Journal and two dozen smaller papers. MediaNews, the majority partner with a 54% stake, competes with Gannett in Detroit.

Hearst’s move hedges its bet on the Chronicle, which has been losing money and shedding circulation faster than other large papers. Hurt by the heavy use of the Internet for news and ads in San Francisco, the Chronicle is trying to find a way to earn more money from its website, which is among the most popular of those owned by newspapers.

Hearst’s stake in the MediaNews operations outside of the Bay Area will amount to roughly 20% to 30%, two people involved in the transaction said.

“MediaNews is a very well-run company, and an equity investment in that company is attractive to us,” Hearst spokesman Paul Luthringer said.

Singleton’s business is highly leveraged, and teaming up with Hearst greatly reduced the amount of money he needed to borrow to buy the papers. The companies didn’t disclose how much cash each contributed to the purchase.

When the dust settled, McClatchy would be the second-largest U.S. chain and MediaNews the fourth-largest, the companies said. MediaNews’ daily circulation in California would grow to almost 1.4 million.

News of the deal, announced after markets closed, had little effect on McClatchy’s stock, which closed at $44.71. The shares briefly rose to $44.95 in after-hours trading, but soon retreated to their regular-session close.