News Corp. (NWSA:US)’s potential breakup into two divisions may lessen concerns by U.K. regulator Ofcom about the company’s control of the British media market, according to a person familiar with the matter.
News Corp., whose Sun, Times and Sunday Times newspapers account for a third of the U.K. market by circulation, said today it’s considering splitting into two publicly held units. The New York-based company has been under investor pressure to carve out its media business from entertainment holdings.
A separation, depending on how it’s structured, could be a way to address concerns over media plurality, said the person, asking not to be identified as no decision has been made. News Corp. last year dropped a 7.8 billion-pound ($12 billion) bid to buy the outstanding 61 percent of British Sky Broadcasting Group (BSY) Plc after legislators objected to the deal following phone- hacking and bribery scandals at News Corp.’s tabloids.
At the time of the BSkyB bid, Ofcom was asked to advise lawmakers on plurality issues. A current investigation by the watchdog into whether News Corp. should keep its 39 percent stake in BSkyB, the largest U.K. pay-TV operator, probably wouldn’t be affected by a News Corp. split, the person said.
Rupert Murdoch, chairman and chief executive officer of News Corp., is overseeing internal discussions on whether to break up the company, said two people with knowledge of the matter, who asked not to be identified because a decision isn’t final. In a statement today, News Corp. didn’t specify how the company would be divided.
A U.K. committee, after probing whether News Corp. misled Parliament in the scandal, where journalists hacked into the phones of politicians and celebrities for exclusive stories, concluded last month that Murdoch, 81, is “not a fit person to exercise the stewardship of a major international company.” The vote among lawmakers wasn’t unanimous and the report split lawmakers along party lines.
Ofcom has the power to force News Corp. to sell or cut its stake in BSkyB, with a market value of 4.4 billion pounds. The regulator, which has said News Corp. has “material influence” over BSkyB, is probing whether News Corp. and its directors are fit to hold a broadcasting license. Ofcom, which monitors control over broadcasters, would still take News Corp.’s holding into account in any separate company, the person said.
Ofcom last week said the U.K. government shouldn’t prevent news organizations from gaining high levels of market share, saying that a review of media plurality every four to five years would be sufficient. An official at the regulator declined to comment today.
In the long term, a split may still help News Corp. distance itself from the hacking scandal and could even lead to a new bid for all of BSkyB, depending on the structure of a separation, said Claudio Aspesi, an analyst at Sanford C. Bernstein & Co. in London.
“It may, over time, result in an opportunity to detach News Corp. from the problems in the newspapers,” said Aspesi. “It will be easier in the context of two separate companies.”
BSkyB rose 2.7 percent to close at 674 pence in London trading. The stock has declined 8 percent this year. News Corp. jumped as much as 8.3 percent in New York.
News Corp. had planned to use the BSkyB acquisition to consolidate its European television holdings, combining BSkyB with pay-TV operations in Italy and Germany, Deputy Chief Operating Officer James Murdoch told an inquiry into media ethics in London in April.
“This merger was about the creation of a pan-European digital television platform,” he said at the time.
James Murdoch, Rupert Murdoch’s youngest son, stepped down from the chairmanship of BSkyB in April because of “my role as chairman could become a lightning rod for BSkyB,” he said in a letter to board members at the time. James Murdoch helped build BSkyB into one of News Corp.’s most profitable businesses.
Will Smith, an analyst at Jefferies in London, said News Corp.’s considerations to split the company look like a concession to regulators.
“They’re saying if you guys take a softer view on us holding this pay-TV business, we will divest or spin out the assets that have been the cause for concern. In effect, you’re giving the regulator a win,” he said. “If you frame it in the regulatory mind set, it’s almost a concession.”
The watchdog, which started gathering evidence in April, has said it won’t be swayed by statements from lawmakers. News Corp. will have to wait before attempting a new bid for BSkyB, said Niri Shan, head of media practice at law firm Taylor Wessing LLP.
“BSkyB is still political dynamite,” he said. “They have to play the long game. Anything they do now won’t help in the short term, but hiving off the newspaper and publishing operations or selling them would put them into a better position.”
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