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Published 07 February 2013 01:18, Updated 11 February 2013 09:09
Sun king ... Analysts predict that Rupert Murdoch will use the News Corp split to return to his first love and start buying up newspapers. Photo: Richard H Cohen
A shell game. A chance to placate angry investors and his family. A chance to prove the world wrong.
Whatever your view of the split of Rupert Murdoch’s News Corp empire, it is clear that the biggest deal of the year will also present the Sun King with his greatest challenge of his career.
When it’s done – probably by the middle of the year – News Corp will become two companies. Fox Group will house the company’s valuable television and entertainment businesses while the new News Corp will include the Australian, British and American newspaper businesses, the group’s publishing and education entities and Australia’s Foxtel cable television group.
Fox Group will be the jewel in the crown and News Corp the old-media laggard that investors have long wanted Murdoch to do away with.
But far from marking the end of the 81 year old’s time as the most powerful Australian-born executive in the world, the creation of the new News Corp presents Murdoch with a highly-desired opportunity for reinvigoration, long-time Murdoch watcher and author of The Man Who Owns the News, Michael Wolff, suggests.
Under the proposed restructure Murdoch will be chairman of both companies but Wolff expects Murdoch will spend most of his time on the newspaper business. “I think he’s delighted with this,” Wolff says.
“The truth is that the entertainment company is all staffed up, it’s led by Chase Carey and there’s not much for him to do.
“It gives him a terrific challenge at this stage of his career.”
Most observers agree that splitting News Corp makes sense on a number of levels. For starters, it placates United States investors who have long seen Murdoch’s beloved newspapers as a weight on the group’s valuation.
This is underlined by recent analyst valuations. A Credit Suisse report in December valued the new News Corp at about $5 a share and Fox Group at about $23 a share. A recent Morgan Stanley report put the Fox Group’s value at $31.83 and new News Corp
With News Corp currently trading at around $27, it’s clear analysts see the split as creating value.
“It’s a sensible and smart thing to be doing,” says Digby Gilmour, an analyst who covers News Corp for Hong Kong-based broker CLSA. “The bulk of the valuation would be free of the largest risks facing the stock.”
Secondly, it allows Murdoch to deal with family politics, Wolff adds.
“One of the things his children want is for their father to be distracted with something other than them,” he says.
“He’s not costing them any money, the entertainment company is their inheritance.”
And finally, it allows the market to see if Murdoch can turn the newspaper business around. Murdoch has been happy to admit that a sell-off of new News Corp shares post split appears likely. Big US investors are expected to be at the front of the queue.
Newspapers have been Murdoch’s first love since taking over the Adelaide tabloid The News following his father Keith Murdoch’s death in 1952.
“This split has little to do with economics. If anything it weakens the publishing business, which is under enormous stress. It will have to sink or swim by itself.” - Mike Mangan, 2MG Asset Management
But the industry’s best days are behind it as newspapers around the world struggle to find ways to improve margins and transform into lighter and more agile companies.
The ongoing transition to digital publishing is the biggest structural shift in the industry since Murdoch begun owning newspapers.
The challenge he faces is to become the world’s most tech-savvy octogenarian. Murdoch’s ability to correctly identify which of the industry’s problems are cyclical functions of the global economy and which are the unavoidable consequences of a change in consumer preferences away from printed news will be crucial.
Fund manager Mike Mangan, who has covered News Corp for more than 20 years in his former role as head of media research for Deutsche Bank and now at 2MG Asset Management, is not optimistic.
He likens the break-up to a shell game. “[Murdoch] moves the pieces around hoping to placate the US investors,” Mangan says.
“The only reason he is splitting the company is because the US shareholders have been banging the drum for many years. In a moment of weakness he agreed with them.
“It has very little to do with economics. If anything it weakens the publishing business, which is under enormous stress. It will have to sink or swim by itself.”
Mangan sees a relative short future for the new News Corp.
“My forecast would be that [the publishing business] will probably be brought back in over a five- to 10-year time period.”
Michael Wolff says the very best Murdoch can hope for is that the business will be modestly profitable.
Wolff nominates underperforming assets New York Daily Post, The Times of Londonand local broadsheet The Australian as underperforming assets that could face the axe.
“He can’t save the newspaper business,” Wolff says. “If he’s really on top of his game, and he’s really being disciplined, he can eek out some small margins.”
But Wolff also argues the split will allow Murdoch something of a fresh start. Given the entertainment business will essentially incorporate all of the value of the pre-split group, Wolff argues Murdoch is “getting his newspaper company almost for free”.
In addition to the newspapers, it’s worth pointing out that the new News Corp will own some valuable non-print media assets, including a valuable stake in Foxtel and a stake in REA Group, owner of property portal realstate.com.au, worth $1.7 billion.
The new publishing business will also be in the enviable position of being largely debt free and stocked with enough cash to buy new assets.
“He has enormous flexibility and I think the he will use that to buy other newspapers,” Wolff says.
Murdoch is understood to be casting a close eye over other distressed newspapers in the US with a view to further acquisitions.
Many appear cheap based on historical earnings, but buying well when a market is in freefall is difficult, even for Murdoch.
Questions of succession and leadership within News and the House of Murdoch looms larger than ever – not that Rupert seems to mind. Quite aside from the damage done to James Murdoch in the British phone hacking scandal, Elisabeth’s current lack of interest in a leadership position and the reluctance of other son Lachlan to commit fully to the family business, their father has ostensibly little interest in relinquishing control.
Robert Thomson, the Australian-born managing editor of the News Corp-owned Wall Street Journal, has been named as the new News Corp’s chief executive but Wolff has little doubt as to who will be calling the shots.
“I think Rupert will be running the company and Robert will be his lieutenant,” Wolff says.
Murdoch hinted at this in announcing details of the split: “This is an incredibly exciting time, for me personally, and for our companies’ ambitious futures.”
As the biggest shareholder in News Corp, Murdoch has the most to gain from the split.
His News Corp shares form the bulk of the Murdoch family’s $11 billion empire.
But by the same logic he also has the most to lose. Should the break-up go badly, Murdoch’s already tarnished reputation stands to suffer its greatest indignity.
Running the demerged business may be Murdoch’s greatest test.
“It’s a new day for him,” Wolff says.
“It’s his last roll of the dice.”