Side deal complicates P-I, Times JOA fight

Four years ago, while attention focused on the change in the joint-operating agreement (JOA) that allowed The Seattle Times to go head to head with the Post-Intelligencer in the morning, Times Publisher Frank Blethen quietly signed another deal.

That side agreement in 1999 gave the P-I's owner, the Hearst Corp., first-refusal rights should Blethen's family sell its stake in The Seattle Times Co.

It has been inaccurately described as part of the JOA. It was, in fact, a private arrangement, with Hearst agreeing to pay the Blethens $10 million over 10 years for the first shot to buy the family's 50.5 percent of The Seattle Times Co.'s voting stock.

Times officials say Hearst demanded the side deal in return for the JOA revision. Details of the agreement are not available, but the right of first refusal generally gives a company the right to match or outbid potential competitors for a sale.

Both Hearst and Times officials say their first-refusal agreement is not part of the JOA and decline to make it public. The Seattle Times Co. board did not vote on it, and a copy of the agreement has not been filed with the U.S. Department of Justice, which must ratify substantive changes in JOAs.

But some legal experts say the side deal raises questions about whether Hearst and the Blethens may have used the JOA's antitrust shield to keep competitors out of the Seattle newspaper market. If the side agreement were challenged, these experts say, it could create antitrust problems for Hearst and the Blethens.

"If the first-refusal agreement led to a purchase by Hearst of the Blethen stock, and therefore majority control of The Seattle Times Co., that raises an antitrust issue," said Jack Kirkwood, an antitrust expert at Seattle University Law School. The JOA, he said, does not necessarily shelter the side deal from federal antitrust laws.

Dimitri Iglitzin, an attorney for The Pacific Northwest Newspaper Guild, which represents workers at both Seattle papers, said the Blethens, as majority owners, face a dilemma.

If the first-refusal agreement falls outside the JOA, Iglitzin said, it would be subject to federal antitrust rules, which prohibit illegal restraint of trade.

But because the Blethens hold a controlling interest in The Times Co., he said, that would put the deal under the JOA umbrella. If that's the case, the deal would then be in conflict-of-interest with The Times Co.'s other owner, Knight Ridder. The San Jose, Calif.-based media chain owns 49.5 percent of The Times Co. and has made at least two bids to buy all of The Times.

"You can't be part of the JOA and not part of the JOA at the same time," Iglitzin said.

Knight Ridder officials, who asked not to be identified, say the company never saw the first-refusal agreement and wasn't asked to approve it. Knight Ridder holds six of The Times Co.'s 16 board seats.

In 2000, a year after the deal was signed, Knight Ridder offered to buy the Blethens' share of The Times Co. for $750 million, including assumption of $250 million of the company's debt. The Blethens rejected the offer.

"The very act of executing that (side) agreement may have restrained competition," said Jon Ferguson, former senior counsel and head of antitrust enforcement at the Washington Attorney General's Office.

"If I were the Justice Department and saw things like this," he said, "I would wonder, 'Did this agreement cause the Blethens to reject Knight Ridder?' "

Neither Hearst nor Blethen would comment. A Knight Ridder spokesman said Chief Executive Tony Ridder wasn't available.

The discussion of the first-refusal rights comes as Hearst and The Times Co. square off in the legal arena. In late April, Hearst filed a lawsuit in King County Superior Court to stop a Times effort to force a shutdown of the P-I.

The Times has initiated that effort by invoking a clause in the 1999 revision of the JOA that allows either paper, if it has had three consecutive years of losses, to demand negotiations to close one paper.

If the two companies cannot agree, the JOA, now 20 years old, dissolves, and both papers are on their own. Hearst has said it cannot continue to publish the P-I outside the JOA. Under the agreement, The Times handles circulation, production and advertising functions for both papers.

At the least, the first-refusal deal highlights the complicated — sometimes contradictory — differences between the public postures and private actions that take place during high-stakes corporate battles like Seattle's JOA conflict.

Blethen, for example, has charged Hearst with using the JOA to bleed the smaller Times Co.'s financial reserves and force it to sell The Times to Hearst. The Blethen family, he says, has held on to The Times at heavy financial sacrifice to preserve what he calls a fiercely independent newspaper as a legacy for Seattle and for future Blethen generations.

But if the Blethens do decide to sell, the Blethen Corp., the family holding company that controls The Times Co. voting stock, stands to benefit hugely.

Industry experts put the market value of The Times itself at around $900 million. The Seattle Times Co. also owns five other smaller dailies in Washington and Maine, two weekly papers and substantial real estate holdings worth tens of millions more.

Frank Blethen has repeatedly said the family has no intention of selling, describing the side deal with Hearst as "selling the sleeves off a vest" — Hearst was paying for something it would never get.

For its part, Hearst portrays itself as a defender of Seattle as a two-paper city. The New York-based media conglomerate insists it has no plans to shut down the P-I.

To underscore that, the first sentence of Hearst's lawsuit declares: "This case is about an attempt by Seattle Times Company, owner of The Seattle Times newspaper, to eliminate one of the two daily newspapers in Seattle."

But Hearst has used a first-refusal agreement before to get rid of a stronger rival. Three years ago, it terminated San Francisco's JOA — and gained a market monopoly — based partly on a first-refusal agreement with the descendants of M.H. deYoung, founder of the San Francisco Chronicle, that city's dominant paper.

The agreement allowed Hearst to make what the Chronicle's investment banker called a $660 million "pre-emptive" bid for the Chronicle, then effectively finish off its own paper, the Examiner.