Regulators analyzing MediaNews’ acquisition of the San Jose Merc, CC Times and Monterey Herald will focus on role of Hearst, owner of SF Chronicle.
Will publishers disclose their secret antitrust filings?
By Peter Scheer
The MediaNews Group, which proposes to buy the San Jose Mercury News, Contra Costa Times, Monterey Herald, and 30 Bay Area weekly newspapers, is paying a 20% premium over the price that McClatchy paid Knight-Ridder for these same publications less than two months ago. Antitrust regulators in the U.S. Justice Department, who must decide whether to go to court to try to block the transaction, will want to know why.
One explanation is that MediaNews, which already owns or controls eight daily and three weekly newspapers in the Bay Area, thinks the deal will yield economies of scale, allowing it to operate its newly acquired properties more efficiently than Knight-Ridder was able to. Another explanation is that MediaNews’ dominance of a restructured market will enable it to raise prices.
From the standpoint of antitrust, the first reason is completely benign. If a merger will allow multiple companies to lower prices to consumers by shedding duplicative costs, antitrust regulators are happy—even if those “costs” are reporters covering overlapping beats. Regulators are agnostics on questions of journalistic quality, or the human toll of lost jobs. The focus of antitrust analysis is on benefits to consumers (with “benefit” defined almost exclusively in economic terms), not benefits to affected companies, their shareholders or employees.
Antitrust regulators will be very concerned, however, if they suspect the second explanation: that MediaNews paid a premium because its competitive position in the Bay Area newspaper market—where its circulation will rise from approximately 290,000 pre-deal to over 800,000 post-deal—will permit it to raise rates. Raising rates, when not justified by higher costs, is the essence of harm to consumers under the antitrust laws.
MediaNews’ share of the Bay Area daily newspaper market will be somewhere north of 65% if the McClatchy sale goes through as planned. MediaNews will own or control every daily in the region except the San Francisco Chronicle (owned by Hearst Corp.), the San Francisco Examiner (owned by Clarity Media Group), and the Santa Rose Press Democrat (owned by the New York Times). While that is a high degree of market concentration—and almost certainly would have drawn a challenge from the Justice Department twenty years ago—it is likely to be seen today as inconclusive.
Why? Because these newspapers not only compete with each other, but also with Craig’s List, eBay, Yahoo, Google and numerous other Internet-based businesses (not to mention television and radio) offering help-wanted ads, real estate listings and sales of new and used cars, as well as retail display advertising. MediaNews’ share of a “market” redefined to include these competitors is small–too small for MediaNews to be able to dictate prices.
But another aspect of the McClatchy-MediaNews deal is not so easily dismissed. I’m referring to the role of Hearst, owner of the Chronicle, which will be MediaNews’ primary competitor in the Bay Area.
As part of the deal, Hearst will also become a MediaNews investor and partner. Hearst will pay to McClatchey $263.2 million in cash for the St. Paul (Minn.) Pioneer Press and Monterey County Herald, while MediaNews will pay $736.8 million for the Mercury News, Contra Costa Times, and various weeklies. After the purchases are completed, Hearst will give the Pioneer Press and the Herald to MediaNews and, in exchange, Hearst will receive a stake (size unspecified) in MediaNews’ properties outside the Bay Area.
Regulators are suspicious whenever they see ostensible competitors engaging in transactions that could cause them to be less competitive with each other—or, worse, that could facilitate an agreement to fix prices or divide up the market. Hearst and MediaNews will point out to the Justice Department that Hearst’s investment won’t reduce its incentive to compete in the Bay Area because its investment will be limited to MediaNews’ properties in completely different markets outside the Bay Area.
But that may not be enough to satisfy regulators. The question they will ask is: Why Hearst of all possible investors? If Hearst’s only function is, as described, to be a source of investment capital for a deal between McClatchey and MediaNews, why not use other investors whose participation would raise no competitive issues at all? Why use the one company that has the resources and incentive to object to the deal, and whose participation creates at least the risk of a lessening of competition?
The answer is not obvious. It may be that Hearst is able to generate tax savings in the deal (hence, the complex purchase-and-swap of the St. Paul and Monterey papers), and those savings make it a cheaper source of capital. Or, it may be that Hearst sees strategic value in partnering with MediaNews in ownership of newspapers outside the Bay Area. Of course, these explanations don’t preclude a scenario that is anticompetitive.
Whatever the answer, the public is entitled to hear it and make its own judgment. Although filings with the Justice Department or Federal Trade Commission in such “pre-merger reviews” are traditionally confidential, let’s hope that McClatchy, MediaNews and Hearst, which are all in the business of making information public, will elect to tell their readers what they are telling government regulators.
Peter Scheer, a lawyer and journalist, is Executive Director of CFAC.