Bankruptcy: No option for newspapers

(breakingviews.com) -- It's hard to imagine any U.S. industry worse off than the automotive sector. That is, until one considers the newspaper business.

Many have already started to shutter. The Seattle Post-Intelligencer shifted to the Web. The Minneapolis Star Tribune, San Francisco Chronicle, and Boston Globe - whose parent is the the New York Times Co. (NYT) - are under threat of closure.

Many newspaper publishers, like carmakers, suffer from too many liabilities, including debt and commitments to workers. But auto companies have an edge that should allow them to restructure and survive, albeit through the bankruptcy process: Until someone invents an affordable version of George Jetson's hovercraft, they can be assured of a minimum stream of revenue.

Not so the newspaper. Even if some publishers wiped out all their debt they'd still be stuck creating a product with high fixed costs and declining revenues, as readers and advertisers migrate to the Internet, where the economics are unappealing. As a result, unlike say General Motors (GM, Fortune 500), closing the presses may be a more viable option than a Chapter 11 restructuring.

Take McClatchy (MNI), the publisher of the Miami Herald and Sacramento Bee, which reported losses last week. McClatchy has $2 billion of debt, which it took on to buy Knight-Ridder, but sports a market cap of just $45 million. Yet it isn't all that debt that's making life hard at McClatchy.

Even if its creditors were to convert their loans to equity, cutting out interest payments entirely, McClatchy would still be losing money. In the first quarter, advertising revenues at the chain plunged 29% from the year before to $285 million. Sure, costs have fallen too, but by only 12%.

As a result, McClatchy has now reached a point where the price of paying its reporters and printing and delivering newspapers to its customers is $11 million greater than the income it generates. And that's before making the $34 million interest payments due to its creditors each quarter.

Sure, a portion of McClatchy's troubles are cyclical. The slowing economy has hit core advertisers of regional papers - local auto dealers, banks, department stores and real estate agencies - particularly hard.

But it's impossible to know how much of the group's woes reflect recession and how many are a result of the secular shift by advertisers away from the printed word towards the likes of Craigslist, job sites, Google (GOOG, Fortune 500) and other platforms.

Without that information, it is difficult to figure out what kind of cost structure the business can support. GM is in a different boat. Consumers may have slowed car-buying for now.

But at some point they will need to replace their clunkers. So, again, until the personal space ship is invented, there will be a viable automobile market, a piece of which General Motors is likely retain. If only it were so for newspapers.