News Corp. Announces Plans to Split Into Two Companies

News Corp. (NWS) announced plans to split into two publicly traded entities focused on publishing and entertainment after shareholder pressure prompted the biggest reorganization since Rupert Murdoch built the media empire.

The publishing business will consist of newspapers in the U.S., U.K. and Australia, as well as book, education and marketing assets, according to a statement today. The media and entertainment company will have film and TV assets. Murdoch will be chairman of both entities and chief executive officer of entertainment when the deal closes in about 12 months.

“Everyone is enormously excited for what we’ll be able to achieve with this split,” Murdoch, 81, said in a phone interview. At a meeting with editors and publishers two days ago, Murdoch invited them “to ask every possible question” about the move, he said. “They all went away very positive.”

With the action, Murdoch is bowing to shareholder demands after a costly yearlong scandal at his treasured newspaper operation, which is seen as a drag on the larger and growing film, broadcast and pay-television units. The phone-hacking probe at the U.K. newspapers has led to arrests and parliamentary hearings, costing News Corp. (NWSA) millions.

Murdoch said on a conference call today that “each entity will be better managed and more easily managed.” Chase Carey, now chief operating officer, will retain that role at the entertainment company.

Lachlan’s Role

News Corp. has yet to pick a head for the publishing company. Murdoch said that his son Lachlan, who serves on News Corp.’s board, probably won’t become CEO of the spinoff.

“It’s highly unlikely,” Murdoch said on the Fox Business Network, dispelling speculation that Lachlan might be picked. Asked if his children will take on an expanded role in either of the new companies, Murdoch said, “They will have to earn it -- and want it.”

Shares of News Corp., which also owns the Fox film studio, broadcast network and cable channels such as FX and Fox News, climbed 25 percent this year through yesterday -- partly driven by speculation that the company would consider a breakup.

The stock fell 1.4 percent to $21.99 at the close in New York. The shares had gained 11 percent in the previous two days after News Corp. first announced it was considering a breakup.

“Rupert realized he’ll be able to unlock the most value for the company by doing this,” said David Bank, a New York- based analyst with RBC Capital Markets. “He gets to strategically do what he thinks is right in terms of their publishing business, and he’s aligning his interest more clearly with his shareholders. It makes sense.”

Better Valuation

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, a person familiar with the matter said.

Centerview Partners, Goldman Sachs Group Inc. and JPMorgan Chase & Co. are advising News Corp. on the breakup, according to people with knowledge of the situation. JPMorgan is working with the company on the capital structure, credit ratings and financing for the publishing company, one person said.

The publishing unit will have no debt and “very large reserves of cash,” Murdoch said in an interview today with Bloomberg Television.

“Our publishing businesses are greatly undervalued by the skeptics,” Murdoch wrote in a memo to employees. “Through this transformation we will unleash their real potential, and be able to better articulate the true value they hold for shareholders.”

Market Value

News Corp. has a market value of about $53 billion. The company may be worth $70 billion to $77 billion by valuing its businesses separately, according to Gabelli & Co. and BMO Capital Markets. The entertainment businesses could command about as much as News Corp.’s current market value, Gabelli said this week.

News Corp. derives at least 70 percent of its annual profit from television. Publishing, which includes Wall Street Journal publisher Dow Jones, the New York Post and the Australian newspaper, contributed about 18 percent of operating income in fiscal 2011, according to data compiled by Bloomberg. Bloomberg LP, the parent of Bloomberg News, competes with News Corp. units in providing financial news and information.

The publishing division gets about 40 percent of its business from the U.S., according to Barton Crockett, an analyst with Lazard Capital Markets. About 40 percent comes from the company’s Australian newspapers and the rest from the U.K. publishing group, where the scandal erupted last year.

Murdoch said today on the conference call that the split isn’t a reaction to “anything in Britain.”

Making Cuts

While the breakup is sure to unlock value for the newly formed entertainment company, the publishing entity will require significant cost cutting, according to Ken Doctor, an analyst with Outsell Inc.

“In order to stabilize it over the next two to three years, they’ll have to make cuts, whether in staffing or possibly divesting some newspapers such as Times of London,” Doctor said in a telephone interview.

The Australian unit of the publishing group will have to undergo some staff cuts, Murdoch said in the interview with Bloomberg News.

“We have not been specific about how many people to lose, but there will be loss in numbers there,” he said. Still, the Australian companies will also expand, he said, without specifying in which areas.

Cash, Debt

News Corp. didn’t discuss how debt or cash would be divided between the new entities. The company had long-term debt of $15.2 billion and cash and equivalents of $10.7 billion as of the end of March. Moody’s Investors Service today affirmed News Corp.’s debt rating of Baa1 -- three levels above noninvestment grade. Murdoch said on the call that the publishing business would have a “robust net cash position.”

The company aims to use the burgeoning tablet market to spur growth of both news and entertainment, Murdoch said today in the memo.

“In five years’ time, there will be at least 75 million tablets in the U.S. and 375 million in the world,” he said. “It is my firm belief that these two companies will be best positioned to compete in this rapidly evolving global economy and distribute our premium content on these platforms.”

News Corp. said on June 26 that it was considering the split, which comes as U.K. media regulator Ofcom considers whether the company should be allowed to keep its 39 percent stake in British Sky Broadcasting Group Plc. (BSY), in light of the phone-hacking scandal.

Voice Mail

The Guardian newspaper reported on July 4 of last year that journalists at the now-closed News of the World tabloid hacked into the voice-mail account of a murdered schoolgirl. The revelation disrupted News Corp.’s plans to take to take full control of BSkyB, Britain’s biggest pay-TV operator.

Rupert Murdoch and his son James, 39, who led the U.K. newspaper operation and headed BSkyB for almost a decade, were called to testify before a U.K. parliamentary committee.

A separation of the publishing business is unlikely to affect Ofcom’s investigation into whether News Corp. is “fit and proper” to own a broadcast license, said RBC’s Bank.

The Ofcom probe wasn’t a factor in the decision to split the company, Murdoch said on Bloomberg Television.

“This was purely a business decision that the company would be better this way,” Murdoch said.

Publishing Profit

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.

The hacking and bribery scandals in the U.K. have led to more than 50 arrests and forced News Corp. to shut down the most popular tabloid in the country, the News of the World, in July 2011. It hasn’t spared the executive ranks, either.

Les Hinton, the former head of Dow Jones & Co. and a close associate of Rupert Murdoch for half a century, stepped down before he was compelled to answer lawmakers’ questions about his time at the U.K. papers, where he claimed hacking wasn’t widespread. Rebekah Brooks, the former CEO of the News International publishing business, also left and has been charged with perverting the course of justice by destroying evidence.

A U.K. committee, after probing whether News Corp. misled Parliament in the telephone-hacking scandal, concluded in May 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.”

To contact the reporters on this story: Edmund Lee in New York at elee310@bloomberg.net; Andy Fixmer in Los Angeles at afixmer@bloomberg.net; Amy Thomson in London at athomson6@bloomberg.net

To contact the editors responsible for this story: Anthony Palazzo at apalazzo@bloomberg.net; Kenneth Wong at kwong11@bloomberg.net; Nick Turner at nturner7@bloomberg.net

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Photographer: Simon Dawson/Bloomberg

Rupert Murdoch, chief executive officer of News Corp., right, Wendi Deng, his wife, centre, and Lachlan Murdoch, a board member of News Corp., left, are driven by car from their apartment in London, U.K..

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Photographer: Simon Dawson/Bloomberg

Rupert Murdoch, chief executive officer of News Corp., right, Wendi Deng, his wife, centre, and Lachlan Murdoch, a board member of News Corp., left, are driven by car from their apartment in London, U.K.. Close

Rupert Murdoch, chief executive officer of News Corp., right, Wendi Deng, his wife, centre, and Lachlan Murdoch, a... Read More

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News Corp., owner of the Wall Street Journal, Fox Broadcasting and Fox News, rose 2.5 percent to $22.31 at the close in New York. The shares have climbed 25 percent this year, partly driven by speculation that arose after Chief Operating Officer Chase Carey said in February that the company would consider a spinoff of the publishing unit. Close

News Corp., owner of the Wall Street Journal, Fox Broadcasting and Fox News, rose 2.5 percent to $22.31 at the close... Read More

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Copies of News Corp.'s newspaper titles, The Sun and The Times, are seen for sale on a newsagent's stand in London. Close

Copies of News Corp.'s newspaper titles, The Sun and The Times, are seen for sale on a newsagent's stand in London.

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Pedestrians walk past the News Corp. headquarters in New York.

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