Rupert Murdoch says News Corp. split in two will unlock value

News Corp.’s decision to split its publishing and entertainment businesses into separate companies is an acknowledgment that newspapers — the foundation on which the $53-billion media empire was built — are a drag on the company’s performance.

Chairman Rupert Murdoch said the difficult choice to sever the company’s news and book publishing businesses from its film and television operations culminates three years of planning. The restructuring, which he hailed as a transformational milestone for News Corp., is intended to unlock value for shareholders, who are attracted to the company’s lucrative entertainment assets.

“We’ve come a long way in our journey that began almost 60 years ago with a single newspaper operating out of Adelaide” in Australia, Murdoch said in a teleconference Thursday. “I’m convinced that each of these new companies would have the potential to continue that journey and prosper as independent entities long into the future.”

Under the plan, the media and entertainment company would be composed of the 20th Century Fox film studio, Fox Broadcasting and its cable television businesses, including Fox News and FX network. News Corp.’s stake in the online television service Hulu — partly owned by Walt Disney Co. and NBCUniversal — also would be included, as would its stakes in various direct satellite businesses such as British Sky Broadcasting and Sky Italia. These combined assets accounted for nearly three-quarters of the company’s revenue over the last nine months.

News Corp. would bring together its publishing operations into a newly created company formed from its global newspaper holdings, which include the Wall Street Journal, New York Post and the Times of London, as well as its HarperCollins book publishing group. The company’s new digital education group also would be added to the portfolio.

John Morton, president of Morton Research Inc., a media consulting firm, said the breakup reflects the grim realities of the newspaper business, whose revenue has been in a free-fall as readers and advertisers gravitate to new digital information sources. Advertising revenue has fallen 50% in the last five years, according to the Newspaper Assn. of America.

“Clearly, the newspaper industry remains under some siege and will continue to be until they figure out how to make money,” Morton said.

The newspapers became a liability for News Corp. in the wake of a phone-hacking scandal in Britain. Revelations that reporters working for Murdoch’s London papers hacked voice-mail messages left for sports figures, politicians and even a 13-year-old murdered schoolgirl rocked the British political establishment and the company. News Corp. closed down the 168-year-old News of the World tabloid, which was at the center of the scandal, and abandoned a $12-billion bid to acquire full control of Britain’s largest pay-television provider, British Sky Broadcasting.

The 81-year-old Murdoch offered a spirited defense of News Corp.’s newspaper business, which has long been his passion. He said the stand-alone publishing company would have a strong balance sheet and the capital to pursue investments and grow the business. He sought to dismiss the “naysayers” who view the announcement as an indication about the bleak long-term prospects of the publishing industry.

“That could not be further from the truth,” Murdoch said. “I believe that News Corp. has the best publishing assets, management and journalists in the business and that the planned separation would finally highlight the relative strength of our publishing franchise versus others in the industry.”

Murdoch, who long has opposed internal efforts to cleave the publishing business from the rest of his sprawling media empire, was convinced that if he could stabilize the newspaper business and successfully transition it to digital platforms, he could once again become a buyer, according to one person with knowledge of the situation who requested anonymity because he is not authorized to speak publicly about internal deliberations.

“Rupert has always loved the publishing business more than Wall Street,” Bernstein Research media analyst Todd Juenger said.

Investors criticized Murdoch’s decision to pay the staggering sum of $5.6 billion in 2007 to acquire Dow Jones & Co., parent company of his long-sought-after journalistic prize, the Wall Street Journal. Two years after that deal, News Corp. wrote down some $2.8 billion on the value of the purchase and has not embarked on other newspaper acquisitions.

The separation could take about a year to complete, and would be subject to final board and shareholder approval.

Murdoch would serve as chairman and chief executive of the media and entertainment company, and as chairman of the new publishing entity. News Corp. Chief Operating Officer Chase Carey would continue in that capacity for the entertainment business.

Another media company successfully accomplished a similar restructuring.

In 2006 media mogul Sumner Redstone divided his Viacom empire into two pieces — Viacom Inc. and CBS Corp. — for several reasons, including his desire to retain two powerful executives, Tom Freston and Leslie Moonves. Some analysts condemned the move, citing the hundreds of millions of dollars in costs that it incurred to establish two parallel administrations with separate legal and computer systems.

Viacom positioned the breakup as a way to concentrate the “fast growing” assets — the cable television channels — together into one leaner company. The thought was that Viacom no long be hampered by the drag of the “slow growing” assets, such as its television and radio stations and billboard divisions. The traditional broadcasting business became CBS.

The Viacom breakup “has been relatively successful for shareholders, particularly the ones that held onto CBS,” said Paul Hodgson, senior research associate with Governance Metrics International. “CBS, once seen as the slow-growing business, has been more successful than Viacom has been in terms of stock price performance, and potentially the same thing could happen with News Corp.”

Hodgson said his firm was reserving judgment until they learned more about the corporate structure of the two companies and whether the Murdoch family will retain its controlling voting stakes in the two companies. The firm has long been critical of News Corp. governance and pay practices.

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Times staff writer Meg James contributed to this report.