New group would include Wall Street Journal, New York Post

Wall Streeters are hailing the silver lining to the phone-hacking scandal that has rocked News Corp. during the past year. The fallout has forced Rupert Murdoch to bow to investor pressure to cleave publishing from entertainment, creating two new companies.

The conglom on Tuesday confirmed it is considering a major restructuring that would separate the publishing assets from the other media and entertainment holdings, or what one analyst calls “the bad News Corp.” from “the good News Corp.”

The restructuring plan caps an tumultuous period for News Corp. that has seen Murdoch wooing Wall Streeters instead of brushing them off, aggressively buying back stock and shunning big wildcard acquisitions like the $5.7 billion purchase of Dow Jones & Co. in 2007 that they never forgave. News Corp. prexy Chase Carey’s influence has waxed, and dynastic heir apparent James Murdoch’s has waned as a result. On Tuesday, News Corp. shares surged 8.3% on the news to close at $21.96, a new 52-week high.News Corp. reps wouldn’t comment on whether the moves may lead to Carey being upped to chief exec, who would run each division or whether there could be a role for Murdoch’s son Lachlan or daughter Elisabeth.

But things are moving quickly; an announcement could come later this week. News Corp. is said to have hired investment bank Goldman Sachs to work up details of a split that Nomura analyst Michael Nathanson calls “the ultimate dream.”

It would likely need SEC and shareholder approval and involves complex tax implications across different countries.

“Ironically, we believe last year’s failed bid to acquire its remaining BSkyB stake has proved to be an unexpectedly defining moment,” Nathanson said. The bid and the hacking scandal are linked as the controversy that erupted at News of the World a year ago forced News Corp. to abandon the $12 billion deal — as well as shutter the newspaper.

A split would isolate the slower growing and less profitable publishing division that’s caused the conglom a massive PR headache and continues to rack up millions of dollars in legal claims. News Corp. could finally “invest directly in assets that are growing without the baggage of publishing,” said Todd Juenger of Bernstein Research.

The Murdoch family is expected to control both entities with a stake of about 40%, like it now holds in the parent company. But depending on the precise structure of the new companies, the idea is that it could lower the heat on News Corp. from various U.K. government inquiries threatening, among other penalties, to yank BSkyB’s broadcast license.

Some think it could allow the entertainment arm to eventually launch another bid for BSkyB, although most think it unlikely as long as the Murdochs are in charge. “Common controlled ownership of both entities by the Murdoch family will remain an obstacle,” said Anthony DiClemente of Barclays Capital.  

The new publishing company is valued at about $5 billion, making it a possible takeover target for a buyer or investor group. News Corp. could even take it private.

The conglom has been sitting on $11 billion in cash since BSkyB fell through, and major questions on the Street is which side gets it and which will house all the costs and liabilities of the hacking scandal. Alan Gould of Evercore Partners figures “the publishing unit would be spun off debt free and pay the legal expenses stemming from the hacking scandal.”

Juenger said a possible use of cash is a special dividend or saving it up for another run at BSkyB.

Industry players also wonder what the move could mean for Murdoch’s plans for the News Corp. empire.

“He is now willing to buy back stock, possibly now willing to split off part of the company; is he also now willing to anoint a non-Murdoch, i.e. Chase Carey, as his successor?”asked Gould.

Analysts think the publishing group could trade at about $13-$14 a share. While there are still some fans of papers, not too many of them are investors. That begs the question of how a stock already dubbed “bad News Corp.” will fare on the open market.

The entertainment division would trade at about $24 a share. Nathanson predicted 2013 revenue of $26.6 billion and operating profit of $5.8 billion.

Publishing would see earnings of about 15¢ per share in 2013, he said.

Gould projects News Corp.’s revenue growth rate would almost double, from 4.3% to about 7%; its operating profit growth would improve from 11.5% to 12.4%, and cable networks increase from 61% to 68% of total income.

Almost 50% of News Corp.’s value resides in its cable networks, Juenger noted.

The entertainment business would include 20th Century Fox film and television, Fox cable nets including Fox News and FX, Fox Broadcasting Co., the Fox Television Stations group and satellite assets.

Newspapers in the U.S., U.K. and Australia, magazines, HarperCollins book publisher, inserts and other businesses would fall under publishing. News Corp. owns the Wall Street Journal and the New York Post in the U.S.

A passing question is what happens to the education division Joel Klein was hired to launch. Klein was sidetracked overseeing a News Corp. committee to coordinate response to the hacking scandal and cooperate with police. He recently handed that role to News Corp. general counsel Gerson Zweifach so he could focus full time on education, which seems mostly likely to land with publishing.

If there’s a split, it wouldn’t be the first time Fox’s entertainment assets have stood on their own. The company was spun out in 1998 as Fox Group back when News Corp. was still an Australian company and thought it wasn’t getting fair value for its U.S. entertainment assets. It was later reabsorbed into the parent.

News Corp. stock has long suffered from a so-called Murdoch discount. Investors tend to see a willful entrepreneur who acts without regard for the stock price or Wall Street opinions. At the same time, he has long been respected on the Street and among his peers for his long-term view and the media powerhouse he created — even though not all his deals work out.

Pressure for News Corp. to separate publishing has been growing steadily. Investors were outraged by the Dow Jones deal, as other media companies shed print assets. The drumbeat grew louder over the past year in the wake of the hacking scandal.

Carey, who is News Corp.’s COO, promised several times recently that execs were taking Wall Street concerns seriously. He is believed to have favored a split, although Rupert Murdoch, who started in the newspaper business, wasn’t convinced — until now.

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