Divide and control: Murdoch's vision looks black for his papers

Splitting News Corp into publishing and entertainment may be the start of a process to sell UK titles. Gideon Spanier reports
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The Independent Online

The past seven days were the week that defined the future of Rupert Murdoch's News Corporation. The 81-year-old media mogul's decision to separate the troubled newspaper arm from the highly profitable television and film entertainment business is a watershed moment.

In theory, both businesses will be on an equal footing. "I am 100 per cent committed to the future of both publishing and media and entertainment businesses," declared the News Corp chairman and chief executive, who insisted the split was not in response to the News of the World hacking scandal.

But as anyone who heard Mr Murdoch at the Leveson Inquiry knows, not everything he says can be taken entirely at face value. While he will chair both new companies, he will give up the chief executive's role at the publishing arm – but keep that job on the entertainment side.

The symbolism is clear: the film and TV interests, from Fox in the US to Sky in Europe generate 75 per cent of sales and 90 per cent of profits – so Mr Murdoch is staying hands-on. But he is taking a major step back from publishing, which includes The Sun, The Times, The New York Post, The Wall Street Journal and book group HarperCollins.

The mood in Wapping, home of the UK newspaper business, News International, is downbeat as staff face a future without the financial cushion of the entertainment arm. Mr Murdoch has done little for morale by warning he is not yet ready to name a publishing chief executive, but his right-hand man and chief operating officer, Chase Carey, will keep that role in entertainment .

There is little doubt Mr Murdoch would have preferred News Corp to stay as a single conglomerate, currently worth $53.5bn (£34bn). But Alex DeGroote, an analyst at City broker Panmure Gordon, says the split looks "extremely shrewd" given the trouble in which Mr Murdoch found himself a year ago, when he closed the News of the World on July 7.

Mr Murdoch is now able to "ring-fence" the papers. What's more, his claim that the split will create "shareholder value" – that the two companies will be worth more than as a single entity – has merit.

Entertainment will focus on profitable film and TV, with no "discount" from the print assets. With a leaner balance sheet, it could even take on more debt to fund acquisitions. The publishing company won't be so attractive but might lure investors if it can pay a solid dividend. "Whether the stock market will show much interest is a moot point," says Mr DeGroote, since it's entertainment that matters to Wall Street.

Importantly, Mr Murdoch will retain 40 per cent of the voting power at both companies, despite owning only 12 per cent, as he plans to keep the dual voting structure. "Shareholders won't hassle the Murdochs because they've got rid of the conglomerate structure," says Mr DeGroote, "and the Murdochs keep control." News Corp shares rose 8 per cent last week on news of the demerger.

Mr DeGroote believes the split also smoothes the way for a fresh bid for the 61 per cent of BSkyB that News Corp does not already own. Mr Murdoch insisted last week he is no longer interested in Sky, after aborting the £7bn deal after the hacking scandal. "I think we've moved on in our thinking on that," he said, speaking in New York. "I would be a lot more reluctant to invest in new things in Britain today than I would be here."

London traders think otherwise. BSkyB shares jumped 2.5 per cent on Friday as the City reckons the odds of a new bid have improved. Mr DeGroote suggests 2014. "By that time there'll be a new management team at News Corp entertainment and a bit of distance from the newspaper and the Leveson Inquiry."

News Corp investors will be handed shares in equal amounts in both arms, assuming the plans are approved in next year's vote. But, while there ought to be demand for entertainment shares, doubts hang over publishing. As newspapers suffer falling sales, tablets and internet paywalls are struggling to make up the shortfall. And then there's the hacking scandal, which could yet see the legal bill hit $1bn, and the distraction of the court cases involving ex-News Int chief executive Rebekah Brooks, above, and other executives.

News Int dismisses talk that Mr Murdoch could off-load the papers. But surprise price rises last week for the Sunday Times, which jumps from £2.20 to £2.50, and The Sun, which goes from 30p to 40p, add to an impression that the papers may be being fattened up for a buyer.

"The split signifies News International is up for sale and is about News Corp consolidating its ownership of Sky," believes Adrian English, the head of media investment at media-buying agency Carat. "The clearing of assets indicates just how tarnished News Int's business has become."

The break-up is not happening in isolation. French media giant Vivendi looks set to follow, after last week's abrupt exit of long-serving chief executive Jean-Bernard Lévy.

By taking the initiative, Mr Murdoch has ensured he stays in control. But it's the screen where his heart is now, not in newspapers.

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