News Corp. (NWS) is considering breaking up the company into two publicly held entities after a phone- hacking scandal at its U.K. newspapers increased pressure to cordon off the publishing business.
Rupert Murdoch, News Corp. (NWSA:US)’s chairman and chief executive officer, is overseeing internal discussions on whether to split publishing from the New York-based company’s entertainment business (NWSA:US), said two people with knowledge of the matter, who asked not to be identified because a decision isn’t final. The shares jumped 8.3 percent on the news.
Murdoch is contemplating the breakup -- a move some investors have sought for years -- after a hacking scandal threatened the company’s holdings in satellite-TV company British Sky Broadcasting Group Plc. Ofcom, a U.K. media regulatory agency, is considering whether News Corp. should be allowed to keep its 39 percent stake in BSkyB. (BSY)
“I don’t think most corporate shareholders (NWSA:US) want to have exposure to U.K. newspaper assets,” said Alex DeGroote, a London-based analyst at Panmure Gordon. “But I think Rupert Murdoch wants the assets, so there’s a conflict between what shareholders want and what Rupert wants.”
News Corp. has hired Goldman Sachs Group Inc. for financial advice on the plan, people with knowledge of the matter said. The breakup talks are at a late stage, and an announcement may come as soon as this week, one person said. News Corp. confirmed the possibility in a statement today, without saying how the company might be divided.
Michael DuVally, a spokesman at New York-based Goldman Sachs, declined to comment.
News Corp. shares climbed $1.68 to $21.76 at the close in New York, the biggest gain since August 2011. The stock has advanced 22 percent this year.
The scandal, which erupted last July, centered on News Corp.’s tabloid journalists hacking into the phones of U.K. politicians and celebrities for exclusive stories. The outcry prompted News Corp. to shelve plans to take full control of BSkyB, Britain’s biggest pay-TV operator, which was led by Murdoch’s son James for almost a decade.
News Corp., owner of Fox Broadcasting and Fox News, derives at least 70 percent of its annual profit from television, and is working to expand in markets outside the U.S. with investments in pay-TV operators. News Corp.’s stock has traditionally traded at a lower price compared with its media peers because of Murdoch’s interest in expanding the publishing business at a time when the industry is in decline.
“Isolating the toxic element and separating it into a vehicle for investors who specialize in these things is a good idea,” said Barton Crockett, an analyst with Lazard Capital Markets in New York.
Chief Operating Officer Chase Carey said in February that executives had discussed a breakup after the scandal spread. “There certainly is an awareness” that News Corp. would trade at higher multiples if it didn’t own newspapers, Carey said. A News Corp. official declined to comment at the time.
The publishing division is expected to bring in about $1 billion annually in earnings before interest, taxes, depreciation and amortization, according to Lazard’s Crockett.
If a split occurs, investors in the rest of the business “won’t have to sweat bullets at night wondering what’s going to happen out of this phone-hacking thing,” he said.
The company’s U.S. publishing assets, which include Dow Jones & Co., the Wall Street Journal and an advertising unit called News America Marketing, account for as much as 40 percent of the total publishing business, Crockett estimates. Another 40 percent comes from the company’s Australian newspapers and the rest from the U.K.’s publishing group. Bloomberg LP, the parent of Bloomberg News, competes with News Corp. units in providing financial news and information.
Possible candidates to lead the publishing company include Lex Fenwick, CEO of Dow Jones; Tom Mockridge, head of the company’s U.K. publishing group, who replaced Rebekah Brooks following the scandal; and Kim Williams, head of the company’s Australian unit, which also includes television assets.
Murdoch, 81, hails from Australia, and News Corp. maintains a large foothold in the country’s newspaper market. The papers, including national daily The Australian, bring in about $530 million in annual EBITDA, estimates Brett Harriss, an analyst at Gabelli & Co. in Rye, New York. That’s more than any other publishing asset within the company, he said.
Dow Jones accounts for about $200 million by the same measure, and News America Marketing, which publishes inserts for newspapers, accounts for about $360 million, according to Harriss. The New York Post, which Murdoch also owns, loses as much as $110 million annually, he said.
A U.K. committee, after probing whether News Corp. misled Parliament in the phone-hacking scandal, concluded last month 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.”
Now Ofcom may force News Corp. to sell or cut its stake in BSkyB. Its 39 percent holding has a market value of 4.3 billion pounds ($6.7 billion).
Ofcom, which has said News Corp.’s existing holding gives it “material influence” over BSkyB, is probing whether News Corp. and its directors are fit to hold a broadcasting license. The agency, which monitors corporate control over broadcasters, would still take News Corp.’s holding into account in any separate company. Ofcom declined to comment today.
The watchdog, which started gathering evidence in April, is in talks with the police and examining civil lawsuits from hacking victims. Appearing before Parliament in July of last year, Murdoch said it was the “most humble day” of his life.
Police probes into phone and computer hacking and bribery have led to the arrests of more than 50 people, including Brooks and Andy Coulson, a former News of the World editor who was once the communications chief of Prime Minister David Cameron. News Corp. closed the Sunday tabloid in July of last year and later replaced it with an edition of the Sun tabloid. In the U.K., News Corp. also owns the London-based Times and Sunday Times newspapers.
Publishing contributed about 18 percent of News Corp.’s operating income in the 2011 financial year, according to data compiled by Bloomberg. Cable network programming generated 57 percent of earnings alone.
In the nine months ended March 31, News Corp.’s publishing unit generated operating income of $458 million, or less than 8 percent of its sales, according to the company’s earnings report in May. The cable networks, film and television units accounted for a combined $4 billion in profit, more than 25 percent of their $15.9 billion in revenue.
“Those that want the higher growth of the broadcast business and have it able to chase new markets will pay a premium for that,” said Peter Esho, the Sydney-based chief market analyst at City Index Ltd. “This is also a good way to quarantine the rest of the business from the recent issues in the U.K. when publishing is a small part of the business.”
The Murdoch family would retain control of both companies, the Wall Street Journal reported today. The Los Angeles-based Fox film and television studios, the Fox broadcast network and Fox News would form the bulk of the entertainment company, the Journal said, citing people familiar with the situation.
A separation of the newspaper business would be in the interest of many investors and some News Corp. managers, said Charlie Beckett, director of the media institute Polis at the London School of Economics.
“It reflects more clearly what a new generation of News Corp. would be about,” he said. “Newspapers in Britain especially are a small part of their overall business.”
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