Clock starts on bid to end JOA between Times, P-I

The Seattle Times Co. yesterday formally notified the Hearst Corp. that its flagship newspaper, The Seattle Times, lost money for the past three years. The notification sets in motion negotiations that could lead to a shutdown of Hearst's Seattle Post-Intelligencer within 18 months.

The action ends months of speculation over The Times' plans for the joint operating agreement (JOA) between the two papers, and comes after Hearst filed a pre-emptive lawsuit yesterday in King County Superior Court. Hearst's lawsuit challenges The Times loss claim and seeks to halt negotiations to shut the P-I.

Hearst spokesman Paul Luthringer said the New York-based media conglomerate hadn't received the full loss notice.

But he said: "The fact is the loss notice does not change our position. It is our view that neither party has the right to trigger the three-year loss provision, and we have requested the court to so determine."

In a statement about the notification, Times Publisher Frank Blethen said the clause was intended to protect the paper "from a multibillion-dollar media conglomerate, willing to absorb financial losses until The Times was forced to sell to them."

Blethen said Hearst tried to get rid of the loss clause when the JOA was renegotiated in 1999, but it remained at The Times' insistence.

"There would not have been an amended agreement without this provision," he said.

Under the JOA, The Times' notification of its losses to Hearst automatically triggers an 18-month negotiating period. During that time, Hearst and The Times are supposed to agree on how to close one paper "as expeditiously as possible."

If they don't agree, the JOA dissolves, and Hearst can operate the P-I as a stand-alone paper. Newspaper experts believe such a costly move would be unlikely.

Under the current agreement, The Times handles all non-news functions such as production, circulation and advertising, for both papers. After expenses related to these chores are accounted for, the two papers split the remaining joint revenue, with 60 percent going to The Times and the rest to the P-I.

If Hearst were to agree during the 18 months to shut the P-I voluntarily, it would get 32 percent of The Times' profit, after both news and non-news expenses are covered, for the next 80 years.

By notifying Hearst of its losses, both The Times and Hearst face risks.

Peter Horvitz, owner of the King County Journal and daily papers in Port Angeles and Knoxville, Tenn., said Hearst could outlast the smaller Times Co. and force it to sell The Times.

With Seattle's economy in the tank, Horvitz said Blethen's challenge will be to last through the negotiating period without being forced to sell its Seattle paper.

Under terms of the revised JOA, Hearst has the right of first refusal if The Times is put up for sale. "I think the endgame is that Hearst wants to own The Times," said Horvitz.

Last year, The Times Co. narrowly escaped pressure to sell assets after a series of economic setbacks caused the company to be out of compliance on its loan covenants. The company made it back into the lenders' good graces by paring $40 million from The Times' operating budget.

Blethen notified Times staff members last month that the paper's finances had again deteriorated to the point where they should expect layoffs. The Times Co. has put real estate up for sale and returned to the city of Seattle previously granted rights to vacate streets at the newspaper's headquarters.

And yesterday, in a memo to employees at The Times Co.'s Central Maine newspaper chain, an official said revenues had dropped significantly and staff members were being laid off.

The memo, from Jean Eichenbaum, vice president and general manager at the Portland Press Herald, noted lenders that provided money to buy the Maine papers in 1998 "can impose severe financial penalties" if certain loan benchmarks are unmet.

On Saturday, Blethen said he believes Hearst's strategy is to "bleed The Seattle Times until we are forced out of business, presumably through a forced sale of the paper to Hearst." He cited what he said were similar situations in the past where Hearst has ended up buying competing newspapers.

Hearst has deep pockets. It owns 12 daily papers and 14 weeklies, as well as 27 TV stations and 17 magazines. Business Week reported that in 2001 the privately held company had revenue of $5.2 billion and $500 million in profit.

In a discussion with reporters at the Newspaper Association of America convention in Seattle Monday, Blethen said "a $5 billion conglomerate" had expressed interest in purchasing a local TV station "to help put us out of business."

Blethen didn't name the conglomerate or the TV station, but Hearst has been rumored to be eyeing KOMO-TV, owned by Fisher Communications. Fisher had hired Goldman Sachs to advise it on several options, including selling some assets.

Fisher Chief Executive William Krippaehne yesterday said talk of selling KOMO to Hearst is "patently ridiculous."

Krippaehne said Fisher has neither shopped the TV station nor received an offer from Hearst, which shares some P-I news operations with KOMO.

A Hearst spokesman said the company would have no comment on either Blethen's statements or the KOMO rumors.

But if The Times is facing a financial crunch, it still has the means to last out the negotiating period, said Doug Underwood, an associate professor in the University of Washington Department of Communication.

Underwood, a former Times staff member who has written two books about Seattle's newspapers, said it is in The Times' strategic interest right now to portray itself as a money loser.

"My sense is the next 18 months are a lot more critical to Hearst than to The Times," Underwood said. "There would be nothing to stop Frank from cutting his newsroom staff in half if he has to. He can control losses the way businesses always do when they're losing money."

Underwood said the JOA's vague wording, especially about Hearst's potential profit if it shuts down the P-I, gives The Times a stronger negotiating position.

The profit split under JOA's 1999 revision, Underwood thinks, gives The Times broad control over the payout.

"At the end of 18 months all Hearst has for its protection is the agreement as it stands," he said.

"They'd be a whole lot better off to shut down the P-I with a clear idea of what constitutes profit under the JOA."

The circulation gap between the two newspapers has widened in the past few years. The Times circulation grew about 2 percent, to 224,140 in the year ended Sept. 30. The P-I's circulation, according to industry figures, fell during the same period by about 7 percent, to 157,558.

Meanwhile, a hearing on Hearst's lawsuit is scheduled Tuesday before King County Judge Bruce Hilyer.

In its suit, Hearst said the losses The Times is claiming result from unnecessary spending or are largely attributable to extraordinary events, including a newspaper strike and the Sept. 11 terrorist attacks. As such, the company said, the losses can't trigger the loss clause. The Times disputes that.