(FORTUNE Magazine) - In November a group of powerful Knight Ridder shareholders made a dramatic announcement. Unhappy with the performance of the company's stock, they demanded that the publisher of the Pulitzer Prize-- winning Philadelphia Inquirer and Miami Herald put itself up for sale.

Prospective bidders are expected to submit offers for the nation's fourth-largest newspaper company this month, and everybody in the media world will be watching. The sale promises to be nothing less than a referendum on the newspaper industry. It may answer two questions that have confounded the best minds in the business and their stockholders: What is the value of a newspaper company in the Digital Age? And does it make sense for Knight Ridder or any of its competitors to remain public?

The list of potential bidders includes publishers like Gannett and McClatchy. MediaNews Group, the privately held newspaper chain based in Denver, is said to be preparing an offer with several private-equity groups, including Madison Dearborn Partners. A private-equity consortium made up of Blackstone Group, Providence Equity, and KKR has expressed interest. The Newspaper Guild is also considering a bid for the nine Knight Ridder newspapers where it represents employees.

Don't expect a bidding war, though. It has never been harder to put a value on a newspaper company. Circulation continues to erode as readers turn to the Internet to keep up with current events. Craigslist is siphoning away help-wanted classifieds. Analysts fear that classified real estate and automobile ads may follow. Yes, newspaper companies have made inroads online, but Wall Street is fixated on these woes, and newspaper-company stock prices have been in a free fall for the past two years.

The exception is Knight Ridder. After it announced that it would explore "strategic alternatives to enhance shareholder value," the company's share price rose from $52 to $63 in mid-November. Analysts cautiously speculate that the company might sell for as much as $70 a share, or $6.8 billion.

That might sound like good news for the industry. But it isn't really. Such a sale would value Knight Ridder at ten times Ebitda. But as recently as January 2005, Lee Enterprises paid a multiple of 13 times Ebitda for Pulitzer Inc., publisher of the St. Louis Post- Dispatch. So Knight Ridder's sale might show that newspaper publishers are worth less than they were little more than a year ago.

Perhaps the most the industry can hope for is that the sale sets a floor on values across the industry. "If Knight Ridder is sold at $70 a share, that's really a sign of modest indifference" from the financial markets, says Merrill Lynch's Lauren Rich Fine, dean of Wall Street's newspaper-company analysts. And what happens to the industry if Knight Ridder sells at a lower price? "All stocks go down," she answers.

That sounds likely. Any publicly traded newspaper company pursuing Knight Ridder would meet stiff shareholder resistance. The day after Knight Ridder revealed that it was putting itself into play, Lehman Brothers downgraded Gannett. "If Gannett buys Knight Ridder, then Gannett's stock goes down and fundamentals worsen and risk increases," the firm wrote in a report, "whereas if Gannett does not buy Knight Ridder and no other buyers materialize, earnings multiples for the newspaper sector should come under pressure, including Gannett's multiples." (Even so, rumors persist that Gannett will join the MediaNews team in hope of divvying up Knight Ridder's papers.)

The private-equity firms that have shown interest would face their own obstacles. They wouldn't be able to cut costs by consolidating operations. Analysts say they couldn't sell off the company's papers without paying big capital-gains taxes. So they would be gambling on selling Knight Ridder in three to five years for a profit. But who can say for sure that the market will be any better then?

This suggests that MediaNews CEO William Dean Singleton is Knight Ridder's most likely buyer. He has private-equity support. He is famous (some would say infamous) for squeezing profits from his papers, which include the Los Angeles Daily News and the Denver Post. Surely he could do the same with Knight Ridder, whose profit margins are lackluster by industry standards. Most important, Singleton runs a private company. So he can take a long-range view of the business. "He told me, 'We think we can hold on to the print business for some time, but we are hoping that by 2012 we will get 50% of our Ebitda on the Internet,'" says Clark Gilbert, an assistant professor at Harvard Business School who has studied the newspaper industry.

It sounds as though Singleton may be able to pick up Knight Ridder at a fire-sale price. If so, he may want to keep shopping around. Even if there is a floor on newspaper-company valuations, it's going to be a creaky one.

DEVIN LEONARD, a senior writer at FORTUNE, can be reached at dleonard@fortunemail.com