News Corp. Split May Be Good for Investors, but What About Wall Street Journal?

Move Would Put Newspapers in a Spotlight of Their Own

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So much for the notion that the phone-hacking scandal at News Corp.'s British newspapers won't affect the company's business in the U.S.

News Corp. confirmed Tuesday that it is considering splitting its media empire in two, separating the TV and movie assets that investors love from the publishing operations that investors care for less. The news was first reported overnight by The Wall Street Journal.

Of course the newspaper industry has been a loser on Wall Street for some years, Warren Buffett's recent investments there notwithstanding. News Corp. CEO Rupert Murdoch and his lieutenants are taking a split seriously now mostly because of fallout from the phone-hacking scandal at News International, the U.K. newspapers division.

The mess has already torpedoed News Corp.'s effort to buy the portion of British Sky Broadcasting that it didn't already own, a much bigger setback in business terms than shutting down The News of the World last July. News Corp. simply replaced the News of the World, a Sunday tabloid, with a Sunday edition of another newspaper anyway.

So dividing News Corp. could help get entertainment assets such as Twentieth Century Fox, Fox Broadcasting and Fox News out from under the various drags of the publishing unit. A Barclays analyst, among others, endorsed that idea in a note Tuesday morning, saying a split "would allow investors to own a higher growth business without the slower growth Publishing business and its associated liabilities."

But where would that leave News Corp. newspapers like The Wall Street Journal and the New York Post?

As far as newspaper companies go, the collective of News Corp. papers would actually fare better on Wall Street than many others, said Tuna Amobi, an analyst at S&P Capital. The Journal is particularly compelling because of its digital successes and affluent audience. "Compared to other newspapers and publishing peers I think they'll be trading in the higher end of the pack," Mr. Amobi said.

But investors have also long viewed the publishing division as a sort of indulgence for Mr. Murdoch, not worth much attention because the TV and movie portions of the business perform so well. Analysts have remained sanguine about the phone-hacking scandal, meanwhile, because they calculated that it would never impact the entertainment businesses -- unless indirectly by encouraging News Corp. to sell off its newspapers, which they would rate a positive development.

In a company of their own, the newspapers would lose the cover of those entertainment assets and find themselves more directly exposed to Wall Street 's expectations for significant and steady growth, Mr. Amobi said. That could mean that the weighty annual losses reportedly incurred at the New York Post would be viewed less indulgently.

Then again, maybe that would be a good thing, another analyst suggested.

"You could make the argument that the publishing business, hacking scandal aside, was possibly under-operated given that management had its attention in so many directions," said Michael Morris, analyst at Davenport & Co. "Losses at the New York Post aren't necessarily going to rise to the attention of the News Corp. board of directors. But if the Post losses become a top-five contributor to the standalone publishing business, all of a sudden there's pressure to try to innovate and try to turn those losses around."

"There may be more value to the publishing assets than the market perceives because they're obscured by the other assets," Mr. Morris added.

On the negative side, however, the publishing assets could wind up responsible for any remaining litigation over the phone hacking scandal -- without the far greater resources of the larger News Corp. "That's a big negative," said Laura Martin, an analyst at Needham & Co. "Any litigation judgment that occurs against the publishing assets would only be able to go against those assets. So you would have a larger risk of financial distress. No judgment is likely to be large against News Corp., because it's a $50 billion company, but it could be large against a $4 billion company."

A spun-off publishing company would likely include not just News Corp.'s newspapers around the world but HarperCollins' book-publishing business; Dow Jones' information-services businesses; and News America Marketing, which publishes newspaper inserts and in-store marketing products. News America Marketing has been the center of alleged misbehavior quite apart from the U.K. phone-hacking scandal, ultimately costing News Corp. hundreds of millions of dollars in settlements.

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