News Corp. (NWSA) shares have gained $5 billion in value since revelations last year that journalists at one of Murdoch’s U.K. newspapers hacked into the voice-mail account of a murdered schoolgirl. The scandal forced the company to abandon its bid for British Sky Broadcasting Group Plc (BSY) and close News of the World, its troubled tabloid. News Corp. stock initially plummeted 25 percent, and led to what the 81-year-old Murdoch called his “most humble day” testifying before a U.K. parliamentary committee.
The pressure on the U.K. business eventually persuaded Murdoch to accept a split, said a person with knowledge of the matter who sought anonymity because the deliberations are private. The stock surged 8.3 percent yesterday to almost a five-year high. BSkyB added 2.7 percent in London on speculation that Murdoch might be able to relaunch his offer.
“For shareholders, this past year has been a win-win,” said Lawrence Haverty, a fund manager at Gamco Investors Inc., which holds more than 5 million News Corp. Class A shares, according to data compiled by Bloomberg. The hacking scandal ended up being “the moment of all buying opportunities.”
Since the story of News Corp. staff intercepting voice mail left for schoolgirl Millie Dowler was published in the Guardian newspaper on July 4 last year, the New York-based company’s market value has swelled by $5 billion, or 11 percent. Investors say a split could boost the stock another 32 percent.
The market-cap gain understates the return for investors, who have seen a 20 percent increase in the share price, to a close of $21.76 yesterday in New York. News Corp. adopted a $5 billion buyback plan in the wake of the scandal and doubled the size of the program in May. The company has repurchased 256.7 million Class A shares at a cost of $4.57 billion, according to a filing yesterday.
News Corp. shares increased an additional 2.5 percent to $22.31 today in New York.
Centerview Partners, Goldman Sachs Group Inc. and JPMorgan Chase & Co. are advising News Corp. on the breakup, according to people with knowledge of the matter. JPMorgan is working with the company on the capital structure, credit ratings and financing for the publishing company, one person said.
For Murdoch, who built his global company on the success of newspapers in Australia, the U.K. and the U.S., the publishing business had been sacrosanct, even as the profit from that segment of his empire dimmed in comparison with the returns from the company’s Hollywood studio, its broadcast network and pay-TV properties such as Fox News Channel. Ultimately, though, he was persuaded that they had to go.
“I don’t think most corporate shareholders 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.”
One reason investors may have won is the rising influence within the company of Chief Operating Officer Chase Carey, whom Murdoch said earlier this year is ready to assume the role of CEO if necessary.
Since that time, Carey has taken on a more high-profile role as the face of the company. His off-handed statement in February that News Corp. would consider divesting its publishing properties under certain conditions sparked a wave of speculation among analysts and outside observers for indications of a shift.
Carey and Chief Financial Officer David DeVoe were key to convincing Murdoch that a split would result in a better valuation for the entertainment group while also allowing him to keep control of his newspaper business, said a person familiar with the matter.
Murdoch resisted the breakup idea until a few months ago, said the person. One of his concerns was that the newspaper business wasn’t strong enough to stand on its own and needed more technology investment, another person said. Murdoch now sees a separate publishing company as a way to spend more on the business without shareholders arguing that funds should go to the entertainment group, this person said.
An announcement of the breakup may come by tomorrow, according to a person with knowledge of the situation. Carey would remain with the entertainment businesses, two people said.
Murdoch, who controls the Wall Street Journal, the New York Post and the Australian, is contemplating the breakup after the hacking scandal last year forced him to pull out of the 7.8 billion-pound ($12 billion) bid to buy the remaining 61 percent of BSkyB. British media regulator Ofcom is now considering whether News Corp. should be allowed to keep its current stake.
Using cash to buy back stock instead of BSkyB has benefited shareholders, Haverty said.
A separation of the publishing business is unlikely to change Ofcom’s investigation into whether News Corp. is “fit and proper” to own a broadcast license, said David Bank, a media analyst at RBC Capital Market in New York.
“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.”
News Corp. got its start in 1954, when Murdoch took over the Adelaide News newspaper in Australia. Four years later, he acquired the broadcast license rights for the town’s first television station.
During the next 50 years, Murdoch built his empire through acquisitions and investments such as the $1 billion used to start BSkyB in 1990, creating what would become the U.K.’s biggest pay-TV service. Through it all, Murdoch defended the newspapers against investors who pointed to declining circulation and advertising revenue as a drag on profits.
While Murdoch closed the News of the World Sunday newspaper in July, he replaced it this year with a Sunday edition of the Sun tabloid.
“The most important shareholders, certainly the institutional shareholders, are almost uninterested in the strategic value of newspapers,” he said.
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.
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, while smaller in revenue, generated 57 percent of earnings.
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.
Bloomberg LP, the parent of Bloomberg News, competes with News Corp. units in providing financial news and information.
While Murdoch has defended the newspaper business, the investigations and Parliamentary trials in the wake of the scandal have taken their toll.
Murdoch and his son James were required to appear before the U.K. Parliament and an inquiry into media ethics called for by Prime Minister David Cameron to explain how illegal practices were allowed to go on for years and why executives feted top politicians on yachts, Christmas parties, weddings and private jets.
Appearing before U.K. Parliament in July, Murdoch said it was the “most humble day of my life.”
News Corp. shareholders in October lodged a protest vote against Murdoch and his sons, following an annual meeting at which investors called for governance changes and an end to voting practices that cement the family’s control.
Murdoch’s son James, 39, said in April he felt compelled to step down as chairman of BSkyB after becoming a “lightning rod” for criticism because of his involvement overseeing News International.
Following News Corp.’s decision to considering splitting into two publicly held units, shareholders are now looking on the bright side.
The two parts of News Corp. would be worth $67 billion to $77 billion, according to reports from Davenport & Co. and BMO Capital Markets. The entertainment divisions could command $52 billion, based on a sum-of-the-parts analysis by Gabelli & Co.
“This would be a nice bonanza,” said Matthew Harrigan, an analyst at Wunderlich Securities. “Despite the phone hacking issues, News Corp. retains a huge global media franchise and a compelling valuation.”