The confirmation that News Corp is actively considering hiving off its publishing businesses from its entertainment operations is a sign of the shifting balance of power within the group.
While there is no doubt that Rupert Murdoch remains the dominant figure within News it has been apparent that there has been a subtle transition occurring within the group, with his deputy chairman and chief operating officer, Chase Carey, taking an increasingly prominent role in its affairs.
That may have occurred anyway – Murdoch isn’t getting any younger – but the UK hacking scandal and the distractions, costs and reputational damage associated with it appears to have expedited the elevation of the highly-regarded Carey into a more powerful and more public position within News.
It is no secret that News’ US executives aren’t as keen on newspapers as Murdoch, who built his empire on them and retains a passion for them despite their decline into near-irrelevance within News as it has built its vast global film and television operations. News’ shareholders are also unenthusiastic about the combination of businesses within the group.
The News of the World scandal, which destroyed News’ ambition of acquiring BSkyB in the UK, would have intensified the debate about keeping the newspapers, already confronted with severe structural challenges, next to those golden assets.
News’ publishing operations, which include the Harper Collins book publishing business, are immaterial in the scheme of the modern News. While they generated about 25 per cent of its revenues in the nine months of this year they produced only about 10 per cent of its earnings in a result that was marred by $167 million of costs related to the News of the World affair.
The appeal of a split to News’ US executives is twofold. One is the distance it would create between the film and television operations and the struggling and, in terms of the UK business, discredited print operations; the other is that it would be expected to unlock significant value.
On some analyses, there is minimal if any value attributed to the print businesses within News’ $US53 billion market capitalisation, indeed they could constitute a negative despite producing nearly $US500 million in earnings for the first nine months of this financial year.
That would suggest that spinning them off could create significant shareholder value, with the film and television businesses getting re-rated positively and the publishing businesses being valued on a stand-alone basis at several billion dollars.
The concept of demerging publishing from the rest has been resisted by Murdoch but the confirmation that it is being actively considered by the News board at this moment suggests he may have had a change of heart.
The spin-off would almost certainly be executed via a distribution of shares in the new publishing entity to existing shareholders – with $US10 billion of cash, News doesn’t need to raise funds through the process – which would allow Murdoch to release value without relinquishing his family’s control of his beloved newspapers. The family holds about 40 per cent of the voting rights in News.
Indeed, with speculation that Lachlan Murdoch might be tempted back into the News fold to run the publishing entity, the family might even be able to tighten its grip on that entity, which most observers believe would otherwise have been off-loaded by News the moment the 81-year-old Rupert Murdoch was no longer in control of the group’s affairs.
If they were within a discrete entity, without the support of the cash generated by the film and television operations, there would inevitably be a greater management and investor concentration on the print businesses and their performance.
To some extent that is already occurring. Last week’s unveiling of a radical restructuring of News’ print-dominated Australian operations by Kim Williams is part of a wider focus within the group on re-engineering its mastheads for an increasingly digital environment.
Williams also, of course, announced a proposed significant shift in the nature of the Australian business with a conditional $2 billion bid for James Packer’s Consolidated Media, with its Foxtel and Fox Sports interests providing the rationale for the offer. He also announced the acquisition of Australian Independent Business Media, the publisher of Business Spectator. How a split, if it does occur, would affect News’ Australian operations isn’t clear.
The News board will reportedly consider the proposal for a split overnight.