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News Corp. Board Said to Approve Plan to Split Up Company

Wednesday, 27 June 2012 11:36 PM EDT

News Corp.’s board approved in principle a plan to split the company’s publishing unit from entertainment, a person with knowledge of the situation said.

An announcement is planned tomorrow morning, said the person, who asked not to be identified because the decision isn’t public.

With the action, Chairman Rupert Murdoch, 81, is bowing to shareholder demands after a costly yearlong scandal at his treasured newspaper operation, which is seen as a drag on the larger and growing film, broadcast and pay-television units. The phone-hacking probe at the U.K. newspapers has led to arrests and parliamentary hearings, costing News Corp. millions.

“Rupert was willing to make some moves that he was historically unwilling to make,” David Bank, a New York-based analyst with RBC Capital Markets, said in a telephone interview. “From a strategic perspective it’s significant.”

News Corp., owner of the Wall Street Journal, Fox Broadcasting and Fox News, rose 2.5 percent to $22.31 at the close in New York. The shares have climbed 25 percent this year, partly driven by speculation that arose after Chief Operating Officer Chase Carey said in February that the company would consider a spinoff of the publishing unit.

Entertainment Unit

News Corp. has a market value of $54.1 billion. The company may be worth $70 billion to $77 billion by valuing its businesses separately, according to Gabelli & Co. and BMO Capital Markets. The entertainment businesses could command about as much as News Corp.’s then-current market value of about $53 billion, Gabelli said this week.

News Corp. derives at least 70 percent of its annual profit from television. Publishing, which includes Journal publisher Dow Jones, the New York Post and The Australian newspaper, contributed about 18 percent of operating income in fiscal 2011, according to data compiled by Bloomberg.

The publishing division gets about 40 percent of its business from the U.S., according to Barton Crockett, an analyst with Lazard Capital Markets. About 40 percent comes from the company’s Australian newspapers and the rest from the U.K. publishing group where the scandal erupted last year.

Publishing Cuts

While the split is sure to unlock value for the newly formed entertainment company, the publishing entity will require significant cost cutting, according to Ken Doctor, an analyst with Outsell Inc.

“In order to stabilize it over the next two to three years, they’ll have to make cuts, whether in staffing or possibly divesting some newspapers such as Times of London,” Doctor said in a telephone interview.

News Corp. said on June 26 that it was considering the split, which comes as U.K. media regulator Ofcom considers whether the company should be allowed to keep its 39 percent stake in British Sky Broadcasting Group Plc., in light of the phone-hacking scandal.

The Guardian newspaper reported on July 4 of last year that journalists at the now-closed News of the World tabloid hacked into the voice-mail account of murdered schoolgirl Millie Dowler. The revelation disrupted News Corp.’s plans to take to take full control of BSkyB, Britain’s biggest pay-TV operator.

Rupert Murdoch and his son James, 39, who led the U.K. newspaper operation and headed BSkyB for almost a decade, were called to testify before a U.K. parliamentary committee.

Ofcom Probe

A separation of the publishing business is unlikely to affect Ofcom’s investigation into whether News Corp. is “fit and proper” to own a broadcast license, said RBC’s Bank.

“Murdoch will still own the newspapers in a split and that shouldn’t change ownership attribution as far as Ofcom is concerned,” Bank said. “If you move newspapers from one pocket to another, it’s still in your pockets.”

In the nine months ended March 31, News Corp.’s publishing unit generated a profit of $458 million, an operating margin of less than 8 percent of revenue, according to the company’s earnings report in May. The cable, film and television units produced a combined $4 billion in profit, a margin exceeding 25 percent.

The hacking and bribery scandals in the U.K. have led to more than 50 arrests and forced News Corp. to shut down the most popular tabloid in the country, the News of the World, in July 2011. It hasn’t spared the executive ranks, either.

Executives Testify

Les Hinton, the former head of Dow Jones & Co. and a close associate of Rupert Murdoch for half a century, stepped down before he was compelled to answer lawmakers’ questions about his time at the U.K. papers, where he claimed hacking wasn’t widespread. Rebekah Brooks, the former chief executive officer of the News International publishing business, also left and has been charged with perverting the course of justice by destroying evidence.

A U.K. committee, after probing whether News Corp. misled Parliament in the telephone-hacking scandal, concluded in May that Murdoch is “not a fit person to exercise the stewardship of a major international company.” Murdoch “exhibited willful blindness to what was going on in his companies and publications,” the House of Commons Culture Committee said in a report. “This culture, we consider, permeated from the top.”

Bloomberg LP, the parent of Bloomberg News, competes with News Corp. units in providing financial news and information.

The Journal reported the board’s decision earlier today.

© Copyright 2024 Bloomberg News. All rights reserved.

Wednesday, 27 June 2012 11:36 PM
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