This story first appeared in the June 21 issue of The Hollywood Reporter magazine.
For much of the first half of 2012, Rupert Murdoch struggled with a decision he knew would affect his legacy as a media mogul: to split or not to split the far-flung entertainment and publishing empire he had built for six decades.
Investors, analysts, bankers and some of his own executives repeatedly had pitched the idea as a way to unlock the value of Murdoch's TV and film assets without the drag of his cherished but more challenged newspaper businesses. After the 2011 phone-hacking scandal at his U.K. papers, which the mogul called "the most humbling [experience] of my career," voices grew louder. But Murdoch, 82, wasn't ready to chop up a family business he grew from an Adelaide, Australia, paper he inherited from his father into a conglomerate with a market capitalization of about $75 billion -- especially when critics would link it to the scandal.
Then, after revisiting the idea during a May 2012 visit to his ranch in Carmel, Calif. -- sources say News Corp. president, COO and deputy chairman Chase Carey and CFO David DeVoe were key advocates -- Murdoch finally changed his mind. On June 28, News Corp. will be cleaved into 21st Century Fox, which will hold the film and most TV businesses, and a new News Corp (no period), home to newspapers, books, education services and Australian TV channels. Wall Street observers say the fate of the new companies will help define Murdoch and his closest lieutenants in the wake of the hacking scandal, which Murdoch called "a major black eye."
The mogul's storied career has been marked by surprising challenges to the status quo, such as the launches of the Fox network and Fox News Channel -- as well as some "spectacular" mistakes, Murdoch said recently, including News Corp.'s failed $580 million acquisition of MySpace. Now he's surprising longtime observers by doing exactly what they have told him.
"All the years of covering News Corp., I never thought I'd see it," says Nomura analyst Michael Nathanson of the split. In July 2011, Nathanson went so far as to divide News Corp.'s assets into three categories: good (cable networks, broadcast TV, a stake in BSkyB and Sky Italia), bad (film, book and magazine publishing) and toxic (newspapers).
Wall Street likes the split for its potential to boost shareholder value: News Corp. stock has risen more than 40 percent since the day before the split was announced in June 2012. (After the change, shares of the old News Corp. will become shares of 21st Century Fox, plus shareholders will receive one share of the new News Corp for every four shares of the old company they owned.) And longtime Murdoch watchers say the plan seems to have reenergized his famed fighting spirit. "I have been given an extraordinary opportunity most people never get in their lifetime: the chance to do it all over again," Murdoch told investors in New York on May 28. "There is opportunity everywhere."
Changes already are afoot. The Murdoch family -- including Rupert, daughter Elisabeth, 44, and sons Lachlan, 41, and James, 40 -- will continue to control a 39 percent stake in both companies, and Rupert will remain chairman of both as well as CEO of 21st Century Fox. But insiders expect him to focus on the News Corp side as CEO Robert Thomson attempts to reinvent its media assets for the digital age. "Rupert will probably spend a lot of time on publishing," says media investor Dennis Leibowitz, managing partner at Act II Capital.
Former BSkyB COO Mike Darcey, hired as CEO of U.K. newspaper arm News International in December, will be a key player to watch as he hopes to rebuild the business after the hacking scandal. Early in 2013, News International gave a glimpse at its strategy when it acquired rights to online and mobile highlights of English Premier League soccer matches for three years. It will show them on the websites and apps of The Sun, The Times and The Sunday Times.
On the entertainment side, Murdoch confidant Carey will remain president and COO, with son James remaining deputy COO. But while Carey is taking a lead role, James is seen as stepping up his involvement in key decisions, particularly on the global TV networks side of the business. James, whose reputation took a hit during the hacking scandal at the News International unit he oversaw, has been spending more time in Los Angeles. Sources say he personally joined Fox Broadcasting chief Kevin Reilly in selecting the network's fall schedule and the recent decision to part ways with longtime reality TV chief Mike Darnell ahead of an American Idol overhaul under Fox's David Hill and Swedish Idol exec producer Per Blankens.
Carey and James also are widely seen as key contenders should the board need someone to step into Rupert's role. The mogul has said he would want one of his children to take over, but Carey is seen as a likely interim choice until James is ready. "The split enhances the influence of Carey and James," says Wunderlich Securities analyst Matthew Harrigan.
Lachlan, close with his father and once considered Rupert's heir apparent, will sit on both boards but have no day-to-day involvement. "I've moved on from that," he told an Australian newspaper June 6 when asked whether he will return to either company post-split. And despite predictions that she could join the board or executive ranks at 21st Century Fox, Elisabeth will remain at her TV production shingle Shine Group as chairman. "I really harbor absolutely no ambition for that top job," she said in 2012.
At 21st Century Fox, analysts say the focus will be on the Fox Networks Group, putting a spotlight on operations headed by Peter Rice. The fast-growing international networks business, shepherded by James Murdoch and Fox International Channels CEO Hernan Lopez, also is expected to get more attention. Lopez has said his segment will reach an operating profit of $1 billion or more in fiscal 2015, up from $600 million during its fiscal year ending in June 2012.
Growth in TV is a key reason its Hollywood assets accounted for $25.1 billion of News Corp.'s $33.7 billion in total revenue during its fiscal year ending June 30, 2012, and those assets account for a majority of the company's market value. "We expect [21st Century Fox] growth of about 13 percent per year to outpace large-cap peers from 2013 to 2016," says Morgan Stanley analyst Benjamin Swinburne.
The key TV drivers have been the company's cable networks, including Fox News, FX and fast-growing international outlets, with this summer's launch of Fox Sports 1 and FX sibling FXX expected to create more opportunities.
"The company's networks are superbly positioned in the U.S. with live sports, broadcast and cable nets, with this combination driving affiliate fees and retransmission payments," says Nathanson. "And internationally, they are in strong growth markets, with their exposure only rivaled by Discovery."
Still, amid double-digit growth at its cable business, the Fox network is seen as a trouble spot despite growing retransmission fees. After eight seasons as the top-rated network, viewership in the 18-to-49 demographic dipped 20 percent during the 2012-13 season as Idol struggled and the network launched only one new hit, The Following. Says Harrigan, "The biggest challenges for 21st Century Fox are TV ratings and secular changes in advertising."
While the film studio's The Internship struggled in its June 7 release, results from that unit (which includes the TV studio, home to Modern Family and Glee) have been solid. Fox's studio profits generally are topped only by Time Warner's Warner Bros.
With TV and film separate, the publishing side will be free to sink or swim on its own. Thomson's elevation to CEO at News Corp is seen as a big expression of trust by Murdoch, so much so that some believe Thomson could be positioned for an even bigger role -- if he can turn around some of the struggling print assets.
The New York Post is said to lose tens of millions of dollars a year, the company's Australian papers have recorded lower ad revenue, and London's The Times has struggled with losses, though The Sun is said to be profitable.
"The biggest challenge is to offset print declines with digital and nonprint," says Leibowitz. Thomson has promised "relentless" cost-cutting and the shutdown of bad assets like shuttered iPad paper The Daily (though sources say Murdoch loves the Post and likely won't kill or sell it). Murdoch and Thomson also have signaled they could increase subscription prices at The Wall Street Journal and launch new subscription offers at its parent, business information powerhouse Dow Jones.
Meanwhile, the fact that the publishing unit will include Australian TV assets -- including Fox Sports Australia, which Lazard Capital Markets analyst Barton Crockett compares with ESPN -- is popular among investors. So is the fact that the new News Corp will start with $2.6 billion in cash and no debt.
"We liked what we heard," Wells Fargo analyst Marci Ryvicker summarized after a May investor day. "New News Corp succeeded in setting realistic expectations -- i.e., that the transformation of new News Corp is going to take some time." Many also expect the new company to announce a dividend soon, which could attract investors.
Murdoch has proved a big buyer of other players -- most notably a 2007 deal for Dow Jones valued at $5.3 billion -- but analysts don't expect a post-split M&A frenzy. Digital and education acquisitions, plus a possible book publisher deal, are mentioned more regularly as possibilities. News Corp's HarperCollins is the second-largest English-language book publisher. "We'll obviously have to do something about that," teased Thomson recently. Meanwhile, without specifically mentioning Tribune's Los Angeles Times, Murdoch has said U.S. newspaper acquisitions would be interesting "if the price is right." But he also has said media ownership rules make such deals "pretty unlikely."
Many believe the split eventually will prompt Murdoch to make another play for U.K. pay TV giant BSkyB, in which his company holds a 39 percent stake. A takeover attempt failed amid the phone-hacking scandal, but a successful split could embolden Murdoch to surprise observers yet again.
Click on the chart below for a larger version (PDF download).