• Forbes, Monday, June 1, 2009 9:30 AM

Gary B. Pruitt, chief executive of McClatchy Newspapers, is slashing costs and playing chicken with bondholders, hoping the competition goes bankrupt before he does. The owner of the Sacramento Bee, Fort Worth-Star Telegram and the Charlotte Observer, is being crushed under $2 billion in debt -- double that of The New York Times Co.

Pruitt has rolled out a two-phase survival strategy. First, he eliminated 4,000 jobs since last June, ended the company's 401(k) match for employees, cut stock dividends, canceled bonuses and shrunk exec pay. Second, Pruitt is offering to pay bondholders a mere 20 cents on the dollar for the $1.1 billion they are owed. If they turn down the offer, these creditors will find themselves last in line should McClatchy file for bankruptcy protection -- no idle threat.

If McClatchy can outlast the recession, Pruitt says the company will succeed in some cities as the last newspaper in town. Analysts say the strategy might succeed. This year, the company will bring in $200 million in digital revenue at higher margins than its print counterparts. But if a rebound in ad dollars doesn't start soon, all of Pruitt's efforts won't be enough.

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