Scenarios multiply in battle between Times, P-I

The bell ending Round 1 in Seattle's fight-to-the-finish newspaper bout has yet to ring, but already the possible outcomes in this complicated dispute keep multiplying.

Attorneys for The Seattle Times Co. and The Hearst Corp. are scheduled to face off Friday before King County Superior Court Judge Greg Canova over the fate of their joint-operating agreement (JOA).

For The Times Co. and its principal owners, the Blethen family, the possibilities focus on how best to use a dwindling supply of time and cash to fight off a much bigger and better-heeled opponent.

For Hearst, one of the nation's largest media companies, the options come down to how to keep its Seattle Post-Intelligencer alive while waiting out the Blethens in hopes they will sell their stake in The Times to Hearst.

History favors Hearst, says Owen Van Essen, a partner in Dirks, Van Essen & Murray, one of the nation's largest newspaper brokers. In nearly every JOA between a large media chain and a family-owned paper, Van Essen says, the chain has come out on top.

Will Seattle's JOA be different? Van Essen declines to speculate, but a look at several possible scenarios suggests the Scrap in Seattle could take some unexpected turns before it is settled.

Possibility 1: The JOA plays out as written.

Early line: Times could win big.

Could this go according to the script? It could, although the script has changed.

A 1999 revision of the original 1983 JOA pitted The Times and P-I head-to-head in the morning and called for a quick shutdown of one paper if either lost money for three straight years.

Times Publisher Frank Blethen notified Hearst at the end of April that his paper lost a total of nearly $10 million in 2000, 2001 and 2002. Blethen also tossed in a barb, accusing Hearst of using the JOA to bleed The Times' resources with the aim of acquiring a weakened Times.

The bleeding could be stanched quickly, however, if The Times has the Seattle market to itself. With only one paper, The Times would no doubt gain circulation and get the economies of scale that come with printing, distributing and marketing just one paper — tasks it handles for the P-I under the JOA.

At the same time, Van Essen estimates that without the P-I, The Times' market value would climb $500 million, from about $900 million to $1.4 billion.

Hearst would seem to get a sizable consolation prize for agreeing to shut the P-I. Under the JOA, it now gets 40 percent of the two papers' pooled revenues — after The Times is reimbursed for handling the non-news operations. The papers then both pay for their own news expenses. If Hearst voluntarily shuts the P-I by October 2004, the agreement provides that it still gets 32 percent for the next 80 years while not having to publish a paper.

But in the fine print of the 1999 revision was this addition: If Hearst agrees to shut the P-I, its 32 percent share would be figured after both non-news and news expenses are deducted. That's a big change from the original formula.

In other words, the Blethens, who boast they spend proportionally more on The Times' news operation than do most other U.S. papers, could keep spending on a solo Times newsroom even if the paper showed a loss. Hearst's share of what's left could be 32 percent of nothing.

Possibility 2: The Justice Department steps in and invalidates the 1999 revision.

Early line: Tentative edge to The Times.

Federal antitrust officials did not pass judgment on the 1999 revision of Seattle's JOA. They didn't have to, explains a lawyer in the Justice Department's antitrust division at the time, because in the eyes of the federal overseers, nothing had happened.

True, The Times moved from afternoon to morning publication, which bolstered its predominance in the market. Its circulation increased year over year by almost 5 percent to 239,468 at the end of March, while the P-I's dropped more than 5 percent to 155,813.

But Justice Department officials viewed the change as a shift within the existing JOA that didn't require their approval. Some legal eyebrows were raised over the 80-year-payout agreement, which was seen as a backdoor buyout of the P-I by The Times, says the Justice attorney. JOAs are exempt from many federal antitrust rules, but one paper still cannot pay off the other to end competition in the market.

But because no money had changed hands and the P-I was still open at the time of the revision, Justice officials let it go, he says.

But that was then. Now, Justice Department officials apparently have had a change of heart. One target of their current investigation of the revised JOA, say several people interviewed by Justice Department attorneys, is the payout provision.

If the Justice Department calls it illegal, the JOA could unravel, and some attorneys believe The Times and Hearst would have to redo their 1999 negotiations.

Would The Times have to go back to publishing in the afternoon? Not likely. But if both sides have to reopen JOA negotiations, it's likely Hearst will try to find ways to rework the 80-year payout and other issues.

Possibility 3: Judge Greg Canova rules for Hearst in this week's hearing.

Early line: Would give Hearst a shot in the arm.

The hearing, scheduled for Friday, is focused on a fairly narrow issue of the broader lawsuit: Does the 49-day strike that caused The Times' 2000 loss of $2.1 million fall within the JOA's "force majeure" clause, as Hearst claims? That would exempt it from being counted as part of the JOA's three years of losses, and The Times Co. would have to wait at least another year to invoke the "stop-loss" provision again.

The Times says force majeure — meaning "greater force," a reference to an extraordinary event or condition — relates only to production and distribution issues, and that nothing in the JOA language excludes a strike when calculating financial results. In other words, says the paper, "a loss is a loss."

That's for Canova to decide. But if he rules for Hearst, time will not be on The Times' side.

Documents filed in Hearst's lawsuit show the privately held Times Co. may be asset-rich, but it's low on operating cash.

Times Co. balance sheets show that while the company's overall assets at the end of May 2002 totaled nearly $500 million, cash on hand was just $10.6 million, down 25 percent from a year earlier. Working capital, a key financial measurement, stood at $2.4 million, down from $2.5 million a year earlier.

The financial squeeze has worsened since then, with Frank Blethen warning in March of possible layoffs and other cutbacks because of fading ad revenues.

Last month, Times President Carolyn Kelly, in an internal memo, painted a grim picture for the Northwest economy and said ad revenue fell below the company's forecast by "a significant amount." Similar problems have plagued papers in Maine owned by The Times Co.

Hearst, on the other hand, can afford to wait. A company spokesman says published reports that Hearst generates about $5.2 billion in annual sales from some 100 businesses it owns are accurate.

During negotiations over the 1999 JOA revision, Times officials say, Hearst insisted on — and received — first-refusal rights to buy the Blethens' 50.5 percent share of The Times Co. voting stock, if the family decides to sell. Terms of the agreement, which was not included in the JOA, are secret. But generally, such pacts give their holders the right to match or better any offer made for an acquisition. Neither Hearst nor The Times will discuss the matter.

Then there is Knight Ridder, the newspaper chain that owns the other 49.5 percent of The Times Co.'s voting stock. Knight Ridder's representatives on the Times Co. board are pretty much silent partners these days, says a former board member.

"The fact was, Knight Ridder didn't have the votes," says a former board member who asked not to be identified. "They'd make their points for the record."

But that doesn't mean Knight Ridder Chief Executive Tony Ridder isn't watching the Hearst-Times fight closely.

Knight Ridder has owned its Times Co. stake since 1929, when it put up $1.5 million to boost the paper's flagging finances. It tried to acquire The Times in the mid-1940s and at least twice since then, once in the early 1990s and in 2000.

Last month, Tony Ridder told The Wall Street Journal he still hopes to own The Times. Because of the first-refusal-rights agreement, however, he's no better than second in line at the outset.

Possibility 4: An ad hoc citizens group's challenge of the revised JOA is successful.

Early line: A tossup.

Dmitri Iglitzin, an attorney for the Committee for a Two-Newspaper Town, says the citizens group's petition to Canova earlier this month, seeking intervener status in Hearst's lawsuit, is an effort to keep both papers open.

"Obviously, we intend to affect the course of events," says Iglitzin, who is also the attorney for the Pacific Northwest Newspaper Guild.

If Canova rejects the committee's motion, Iglitzin says, the group will file its own lawsuit opposing The Times' loss claims and the entire 1999 revision. That would probably accomplish what months of JOA negotiations haven't — pull both sides together, in opposition to the committee's suit.

Even if winning a lawsuit may be a long shot, it costs only $110 to file a suit in state court, and Iglitzin says the committee is pressing others, including the Justice Department, the state Attorney General's Office and Knight Ridder, to join the fray.

The committee hopes to focus attention on the JOA's 80-year payout provision, which Iglitzin calls "a blatant restraint of trade."

"We hope our lawsuit will give Hearst great hesitation about getting out of this market," he says.

Or at least, he adds, the lawsuit could delay a shutdown of the P-I and provide several more months of work for the Guild's members.

"One gets what one can when one can," Iglitzin says.

Possibility 5: Hearst buys KOMO-TV and outflanks The Times.

Early line: Big boost for Hearst.

Last July, Hearst told Business Week it was on a hunt for TV stations, especially in the dozen cities where it owns newspapers. Hearst didn't single out Seattle or mention that the Federal Communications Commission barred cross-ownership of newspaper and TV properties in a single city.

But within the media industry, it was no secret that one possible target was struggling Fisher Communications. The Seattle-based media company, with a dozen TV stations, including Seattle's KOMO-TV, needed cash. Fisher had hired Goldman Sachs, the investment bankers, to approach potential buyers, including Hearst's TV unit, Hearst-Argyle Television.

A lot has happened since. In February, Fisher said it had decided to hold on to most of its radio and TV properties. Then in June, the FCC voted 3-2 to allow media cross-ownership, a move that, among other things, likely boosted the value of Fisher's media properties.

What has not changed, a Hearst spokesman said last week, is the company's intention to buy more TV stations.

Would Fisher sell KOMO to Hearst? William Krippaehne Jr., Fisher's president and chief executive officer, reiterated that the company intends to hold on to its media properties.

"Too many people are leaping to wild conclusions," Krippaehne says, dismissing rumors of a sale to Hearst. But, he adds, "This (FCC issue) has the potential for far-reaching implications, particularly for Seattle."

Those could be ominous words for The Times and its owners. With KOMO and the P-I in its pocket, Hearst would have the option of waiting out the 18-month negotiating window under the JOA to shut the P-I. In that case, the JOA would dissolve and Hearst would be free to publish on its own.

If Hearst elected to keep publishing the P-I, it would be in position to squeeze The Times, offering advertisers a combined TV and print package.

That would give the Blethens a tough choice: Sell The Times, with Hearst being the first, and possibly the only, bidder. Or take on a punishing fight against a deep-pockets rival.

"The signal that shows the Blethens are really in trouble," says Doug Underwood, a communications professor at the University of Washington, "is an agreement between Hearst and KOMO."

Still, there are some big ifs attached to that option.

Hearst gave up the P-I's presses, delivery trucks and advertising and marketing departments when it entered into the JOA. The paper operates its newsroom in rented office space on the Elliott Bay waterfront, but without The Times to handle non-news operations, Hearst says the P-I couldn't publish.

Building a new plant to print the P-I would cost Hearst hundreds of millions of dollars and is unlikely. But using someone else's printing press or plant would cost far less.

Jeffrey Stalcup, operations director at The News-Tribune in Tacoma, says his paper's owner, The McClatchy Co., recently surveyed every available printing-press operator from Olympia to Bremerton to see who could publish the P-I. It found only one with enough capacity to handle the P-I's 155,000 circulation.

But the operator, Rotary Offset Press, is owned by The Times Co.

Buying a press to print the P-I would cost Hearst at least $20 million, Stalcup estimates, although Hearst could probably find a cheaper used model. And Hearst would still need to find a partner to help set up the other non-news operations.

Peter Horvitz's name usually comes up at this point in the conversation. Horvitz, owner and publisher of the King County Journal, recently finished building a 60,000-square-foot printing plant in Kent. Would he partner with Hearst? In the past, he has said no; he doesn't have space on his press for the P-I.

These days, he is less definite. "There is space in our building for another press, and it is technically possible if Hearst came to me and said, 'We would like to make a deal to print the P-I,' " he says. The News Tribune also has space for additional presses, he adds.

"One or both of us could do it," he says.

That kind of deal would probably take two years to be up and running.

Horvitz says he believes the Justice Department would press The Times to keep printing the P-I past the 18-month JOA shutdown deadline if Hearst intended to keep the P-I going.

In the end, perhaps, Seattle's winding JOA trail could go through Horvitz and KOMO to Hearst as the survivor in a one-newspaper town.

Or maybe not.

"There are an awful lot of unknowns," says Horvitz, who says he has not been approached by Hearst. "The whole thing rides on Hearst's intentions."

Bill Richards is a free-lance writer hired on a special contract by The Seattle Times to cover events involving the joint-operating agreement with the Seattle Post-Intelligencer. He can be reached at brichards@seattletimes.com