If no media company wants to acquire the key Fairfax newspaper assets – a scenario which is looking increasingly likely – what will happen to The Sydney Morning Herald and The Age? Can they stay where they are and can Fairfax simply return to where it was two weeks ago?

Almost certainly not. With the cross-media laws set to change, with a “friendly” Rupert Murdoch squatting near the top of its share register, with the Fairfax business in decline and with the appetites of its institutional shareholders whetted by seeing their shares trading at $5.20, it is impossible to imagine Fairfax could return to its pre-Coonan status quo (with a share price with a 3 in front of it).

Something has to happen at Fairfax over the coming months, otherwise the shareholders will revolt. So what is that something?

PBL Media insists it won’t buy the Herald or The Age (although they could be interested in picking up the Financial Review), so let’s take them at their word. News Limited can only buy the two broadsheets if they sell/swap the Daily Telegraph and the Herald-Sun – a scenario Rupert Murdoch dismissed last Friday in New York with the “friendly” comment that “I like assets that are growing rather than shrinking.”

With a price-tag of more than $1.2 billion each (based on a $5.60 share price and including their online assets), the two papers are too expensive for any other Australian media company to swallow in one mouthful. That leaves overseas media companies (highly improbable given their own problems), Macquarie Bank’s media arm, Telstra/Sensis or private equity players (either alone or in concert with a media company).

So will the private equity juggernaut roll into media land? Well, it has just started to happen in the US, where overnight the Wall Street Journal is reporting – in an echo of the Fairfax situation – that groups of private equity firms are beginning to wade into the auction for America’s biggest newspaper company Tribune Co – “and likely stand the best hope for a company trying to sell itself amid weak financial results, an uncertain future and a divided board of directors.”

But would private equity “magic” work on the media assets? This is what Alan Kohler says in yesterday’s edition of the Eureka Report (in which I have an interest):

It might be reasonable to gear up utilities such as gas pipelines and toll roads and even retailers like Coles Myer, but it’s another matter entirely to gear up volatile media companies, which are themselves leveraged plays on the business cycle. Alan Bond found that when he bought the Nine Network from Kerry Packer for $1 billion in 1987 using debt funding and then had to sell it back to him for $250 million three years later. Now the Nine Network, along with PBL’s magazines, have been geared up again.

Of course, there’s another very real option for Fairfax. Instead of waiting to become a carcass, the Fairfax board could go macho and decide to buy something – like the Ten Network or Southern Cross Broadcasting, for example.

That sounds positive, except for one small problem. Because Fairfax has so badly mismanaged its existing business and is so bereft of media industry expertise, why would its institutional shareholders support paying overblown prices to mismanage another business in a completely different media form?

Depressing as it sounds to anyone who cares about the future of good journalism, The Age and The Sydney Morning Herald are now billion-dollar assets swinging helplessly in the breeze.