A phone hacking scandal has led to dramatic fallout at media titan News Corp., which is bowing to investor pressure to cleave publishing from entertainment, creating two new companies.
Chairman-CEO Rupert Murdoch, 81, has never been one for bowing, which is why the scandal has been a win for News Corp. shareholders, many said Tuesday. Murdoch has been 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. Chase Carey’s influence has waxed and dynastic heir-apparent James Murdoch’s has waned as the conglom considers a major restructuring to split in two, separating what one analyst calls “the bad News Corp.” from “the good News Corp.”
Shares surged a whopping 8.3% Tuesday to close at $21.96, a new 52-week high.
News Corp. reps wouldn’t comment, beyond confirming a possible restructuring, whether Carey could be upped to chief executive, 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 circa 40% stake, 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 a major question 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 might 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.
Carey’s influence has increased as heir apparent James was tarnished by the hacking scandal, which started before his tenure as head of European and U.K. operations but exploded on his watch. He’s moved back to New York and is keeping a low profile.
Lachlan Murdoch, Rupert’s oldest son and former heir apparent, left the company in 2005 but there’s been buzz about his possible return given James’ difficulties. He is steeped in the newspaper business and, like his father, enjoys it. Rupert’s daughter Elisabeth, a successful entrepreneur who created TV producer Shine Group, came in-house when she sold Shine to News Corp. last spring and has been actively in the mix since then.
She was offered a board seat after the sale but decided to wait until a calmer time. The News Corp. board has been under fire on both sides of the Atlantic for being too passive when evidence of phone hacking first emerged and not fulfilling their duty to (non-Murdoch) shareholders.
Analysts think the publishing group could trade at about $13-$14 a share. While there are still some fans of papers, not to 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 cents 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’s cable networks include 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 re-absorbed 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.
It’s been years since a major media company split or merged after a raft of dubious mega-deals turned CEOs gun shy. AOL and Time Warner merged, and then split. So did CBS and Viacom, and Universal parent Seagram and Vivendi. Comcast’s acquisition of NBCUniversal in 2009 was the latest major media deal.
Wall Streeters say the News Corp. move makes more sense than other historic splits like when Viacom carved itself in half in 2005.
“Despite the seemingly obvious comparison, we view this potential split-up quite differently, and potentially much more favorably than the Viacom split-up,” said Gould.
“It never made sense, in our view, to split the broadcast network from the cable networks or the film production and distribution from TV production and distribution. Viacom tried to create two relatively equal sized companies when it split the assets. New Corp.’s plan appears to simply be splitting the lower-growth, lower-multiple publishing assets from the higher growth cable networks, film and TV broadcasting,” he said.
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.
COO Carey promised several times recently that execs were taking Wall Street concerns seriously. He himself is believed to have favored a split, although Rupert Murdoch, who started in the newspaper business, wasn’t convinced. Murdoch has apparently warmed to the idea.