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WILMINGTON, Delaware (Reuters) - Billionaire investor Warren Buffett told his annual meeting that it "blows your mind" how quickly the newspaper industry is losing the fight for readers and advertisers.
Yet several companies that would collectively form the second-largest U.S. newspaper group, with a daily circulation of around 4 million, are expecting years of rising advertising sales, their main source of revenue.
These publishers, whose papers include the Trentonian in New Jersey and the Star Tribune in Minneapolis, have one other thing in common: They all have been bankrupt.
Buffett, whose Berkshire Hathaway Inc (BRKa.N)(BRKb.N) owns the Buffalo News and a stake in the Washington Post WPO.N, told his annual gathering of shareholders earlier this month that the outlook is really tough for newspapers.
But a handful of publishers are hoping that rinsing a combined nearly $2 billion in debt through bankruptcy will give them the capital to reinvest and halt a revenue decline that plagues the industry.
"Yes, the margins and profits of past years will never be repeated, but that doesn't mean that these businesses can't make rational sense once the crushing weight of borrowed money is written down in some way," said Alan Bell, a former chief executive officer of publisher Freedom Communications, which recently came out of bankruptcy.
Many newspaper companies have been able to stay profitable by hacking away at costs. What sets the bankrupt publishers apart is that they forecast stable or even rising ad revenues for years to come, although this would follow declines of 30 percent or more prior to their Chapter 11 filings.
Consider the Journal Register Co, with its circulation of 400,000 by way of 19 dailies, including the New Haven Register. It forecasts ad revenue will rise 8.4 percent over 2010-2013, according to bankruptcy court documents.
Journal Register cut $500 million of its debt in bankruptcy and is now trying to grab readers by giving reporters cameras and blending print and video. It has said it is looking for areas to add editorial staff, a rarity in the industry.
"These companies are trying to come up with new products beyond yesterday's news in tomorrow's paper," said newspaper consultant Alan Mutter. "They get that the business is declining and wasting."
He pointed to MediaNews Group, which recently introduced a glossy lifestyle magazine to supplement its 54 dailies and their circulation of more than 2 million.
"The fact is, that's something they could not have done before bankruptcy," said Mutter.
MediaNews Group's holding company recently shed $765 million in debt through bankruptcy, and it expects advertising revenues to pick up this year and keep rising through 2013, according to court documents.
The company owns the Detroit News, the St. Paul Pioneer Press in Minnesota and the San Jose Mercury News in California. Its CEO recently indicated it may use the newfound strength of its balance sheet to snap up weaker rivals.
Other examples include Freedom, which owns the Orange County Register, and the Star Tribune Media Co, which owns the top daily in Minneapolis. Both forecast ad revenue to begin rising this year or next, and each scrubbed about $400 million of debt through bankruptcy.
Mutter said that newspaper companies that clear a chunk of their debt gain critical flexibility.
"The people who didn't cleanse through bankruptcy are running around with big fat rocks in their pockets."
Bankruptcy also provides shock treatment that can change entrenched interests, said Michael Epstein, a managing partner of turnaround firm CRG Partners.
"It's like having a mild heart attack," he said. "How are you going to treat your body after that mild heart attack? Are you going to continue to pollute it or begin to take care of it?"
But not everyone agrees with the recently bankrupt publishers' forecasts.
Brian Tierney, who was CEO of Philadelphia Newspapers LLC when it filed Chapter 11 last year, has said the hedge fund and bank lenders that now own rival publishers have used upbeat forecasts to justify piling debt on the newspapers after they emerge from bankruptcy.
As Buffett has said, that could lead to more financial trouble if it turns out the business is eroding.
Fitch Ratings analyst Mike Simonton said newspaper ad revenue might stabilize this year, in part because of easy comparisons with a very weak 2009. But he doubted cutting debt could free up capital soon enough to halt a long-term decline.
He noted another possible reason for the publishers' optimism: shaky forecasting.
"These companies typically missed predictions and projections about their revenue going into the downturn," he said, "and it's not surprising that many would miss coming out."
Additional reporting by Jennifer Saba in New York; Editing by Lisa Von Ahn