Rupert Murdoch has finally bowed to the demands of frustrated shareholders and conceded that News Corporation, the worldwide media empire he constructed, may have to be split in two after the phone-hacking scandal tarnished the reputation of his newspaper division.
The move would be the biggest corporate upheaval in the history of the group, over which Murdoch and his family have retained a tight grip since he established it in 1979.
Murdoch has for years fought off calls to hive off News Corp's publishing assets – including its scandal-hit UK newspapers – from its film and TV businesses.
But the crisis that caused the closure of the News of the World and resulted in the Murdoch clan being called before the British parliament was the last straw for shareholders, who ratcheted up the pressure on the News Corp board in a bid to achieve a higher stockmarket valuation for the non-newspaper assets.
The company was forced to confirm the news after a leak to the Wall Street Journal, which it owns. It said in a brief statement issued in New York: "News Corporation confirmed today that it is considering a restructuring to separate its business into two distinct publicly traded companies."
No further details were forthcoming, but analysts expect that News Corp's Fox TV network and Twentieth Century Fox film studio would form the heart of the more profitable new company. Those businesses accounted for $23.5bn (£15.1bn) in revenue in the year ended in June 2011.
The publishing arm would include News International's UK papers – the Times, Sunday Times and the Sun – the WSJ, the New York Post, The Australian and the book publisher, HarperCollins. Those assets generated $8.8bn (£5.6bn) in the same period.
Michael Wolff provides analysis of the news:
This may be the most humble day of Rupert Murdoch's life. His company seems to be spurning his newspapers, and also his leadership – or at least, his Sun God standing. Early Tuesday morning, News Corporation said, through its newspaper, the Wall Street Journal, that it was considering a spin-off of its print properties. Since using the Journal made this something of an in-house announcement, for "considering" one might better read "actively planning".
Perhaps not coincidentally, Chase Carey, News Corp's chief operating officer, was spied yesterday having lunch with Stan Shuman of Allen & Company, one of the company's long time investment bankers. Lunch was at Michael's, the media business canteen in New York, where they were sure to be seen – possibly something, in other words, of a victory walk for Carey, who is the primary operator of the entertainment assets which would become the whole of News Corp.
Even before the phone-hacking scandal in Britain killed the News of the World, the company's newspapers were an issue of internal complaint. From a rational business view, the papers consumed far more resources than any returns they can ever hope to offer. Still, because News Corp was singularly Rupert's company (pay no attention to its public shareholders), and Rupert was atavistically committed to his newspapers, there could be no real debate about their future.
The $5.6bn acquisition of the Wall Street Journal in 2007, at a steep premium to its market value, happened despite the recognition by News Corp's executives that the deal would have a profound negative impact on News Corp's shares – and despite the fact that the Journal would shortly be worth only a fraction of what the company paid for it. If Rupert wanted a paper, he got a paper.
But then there was the phone-hacking scandal. And perhaps even worse for the newspapers: investors everywhere suddenly seemed to wake up and agree that the newsprint titles were not just shrinking, but dissolving assets. By getting rid of the papers in the US, UK and Australia (together with Harper Collins, News Corp's book publishing company), the shares of News Corp itself could even be expected to rise. The phone-hacking saga, and the diverted attention, if not the much-reduced status, of the Murdoch family, was the opportunity.
But what of the papers, then? And of Murdoch himself?
The print division made a small profit last year. With the closing of the News of the World, one of its big earners, and with the continued fall in newspaper circulation and advertising, those earnings may be expected to disappear almost immediately. That will leave the three big money losers particularly exposed: the New York Post, the London Times, and the Wall Street Journal. The losses among them might be as great as $250m.
It is almost impossible to imagine that a stand-alone public print company would not have to quickly cut costs and dispose of those assets that do not have a credible path to profitability. Indeed, for each of News Corp's newspapers, protected so long by the company's vast diversification, being spun off, instead of sold to enthusiastic bidders, might be their worse fate.
And curiously, the papers, while they lose the upside of being part of News Corp, maintain what is arguably the downside: Rupert Murdoch.
Rupert and the Murdoch family trust will still control the papers. Indeed, this odd move, to create a company of ever-weakening businesses, may have been, for Murdoch, a bad choice – but a better choice than selling and losing them.
Meanwhile, it's awfully good news for Chase Carey and the new entertainment-focused company. Rupert and the other Murdochs will have an ever-deepening quagmire to attend to with the newspapers, keeping the Murdochs at an even greater distance from the entertainment business. Indeed, that is the de facto division that exists now, but the separation becomes cleaner and more widely understood with an actual split.
Surely, Rupert Murdoch can be counted on to follow his heart. By early morning, rumours were circulating among Rupert-watchers that Lachlan Murdoch, Rupert's oldest son and once the heir-apparent, who had been forced out of News Corp by the ever-more-powerful entertainment executives and into exile in Australia, might be tapped by his father to head the new newspaper company.
In fact, Lachlan would not even have to relocate because the Australian operation will become the centerpiece of this new company – thus bringing the long story back to where it all began.
And now I see why Joel Klein left the internal News Corporation hacking committee and returned to his "post" at the News Corporation for-profit education division.
Klein's most likely going to be tapped to run the newspaper division, along with the education division and Harper Collins - the least profitable part of News Corporation.
Joel Klein - CEO of the company that runs (at least for now) the NY Post.
If he gets the job, we'll see if he can save Murdoch's newspapers by making his education division profitable enough to carry the rest.
Michael Wolff never mentions whether he thinks the education division can save the newspaper division, but from what I gather from the rest of his column, it seems the Murdoch newspaper division is going to have a difficult slog ahead - and the Post may not survive it.