Analysis: Investors call for Murdoch to dump his first love

NEW YORK Tue Jul 12, 2011 10:00am EDT

Copies of the final edition of the News of the World are printed on the presses at the News International print works in Waltham Cross, southern England July 9, 2011. REUTERS/Ian Nicholson/Pool

Copies of the final edition of the News of the World are printed on the presses at the News International print works in Waltham Cross, southern England July 9, 2011.

Credit: Reuters/Ian Nicholson/Pool

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NEW YORK (Reuters) - About 18 months ago, one of News Corp's leading shareholders had a meeting with Rupert Murdoch and his son James, and implored them to get rid of the newspaper business that has long been a drag on the company's stock price.

"Too bad they didn't listen," said the shareholder, one of the top 10 investors in News Corp. "I pressed them to spin the newspapers off as a separate company. They could keep control, but just get rid of them to bring up the stock value and highlight the value of other assets."

"They kept talking about how news blood ran in their veins and the answer was a resounding no," recalled the shareholder, who spoke on condition of anonymity. "James was just as adamant as Rupert, even worse."

Had the Murdochs listened, News Corp would likely be in a better position to contain the U.K. phone-hacking scandal and stop it from tainting the rest of the media empire, such as its planned buyout of British satellite operator BSkyB.

With News Corp shares down 14 percent in the week since the News of the World scandal exploded, Murdoch is facing more pressure to split off his British newspapers from a conglomerate that also includes the 20th Century Fox movie studio and Fox News cable channel.

The phone-hacking scandal has already delayed News Corp's proposed $14 billion buyout of the 61 percent of BSkyB that it does not already own, as the company was forced to agree to have the deal reviewed by competition regulators.

Chris Marangi, a portfolio manager at Gabelli Multimedia Funds, which holds News Corp shares, said a sale of News International would be welcomed by investors.

Run by James Murdoch, News International owns Murdoch's British papers, namely the Sun, Sunday Times, Times of London and the now-defunct News of the World.

"If that is the price of a BSkyB deal, it may make sense assuming they can strike a reasonable deal with the Sky Board," said Marangi, pointing to the 16 percent fall in BSkyB shares since July 4.

"A BIG PANIC"

Amid reports on Monday that News of the World was not the only Murdoch paper that practiced phone hacking, Murdoch biographer Michael Wolff said he has heard strong speculation that News Corp may sell or spin off News International.

"It's come about because they're in a big panic right now, they don't know what to do," Wolff said.

"There has always been a faction within News Corp that has asked Rupert to get rid of the newspapers including former No.2 Peter Chernin and Fox News chief Roger Ailes. I imagine Chase Carey is also not keen on papers. This has become an opportunity for that faction."

Carey, News Corp's deputy chairman and chief operating officer, is the former chief of DirecTV Group and is known to have little interest in the newspaper business. He has focused on driving revenues across Fox TV.

Indeed, spinning off News International would be a difficult decision for Murdoch so soon after he closed down News of the World, the paper that started his international media empire. It would also be an admission that print is no longer a part of his company's broader future.

But newspapers have become a pariah for most investors in big U.S. media companies. They are often used to explain why News Corp shares have underperformed rivals such as Viacom Inc and CBS Corp over the last year, the so-called "Murdoch discount."

INORDINATE INFLUENCE

Even though News Corp's British newspapers account for just over $500 million in revenue, or 5 percent of the company's total, the phone-hacking scandal has wiped $4.7 billion off the conglomerate's market value in the past week alone.

"The market has a central tendency to overact," said Donald Yacktman, chief investment officer of Yacktman Asset Management Co of Austin, Texas, the ninth-largest investor in News Corp.

"It does slightly reduce the predictability of the cash flows, but the impact on the cash flows is minimal at best," he said.

It also shows how even a relatively small asset in terms of revenues could potentially hurt the company's wider strategic interests.

Critics of Murdoch will point to a series of missteps by News Corp: it paid $5.6 billion in 2007 for Dow Jones & Co, the owner of the Wall Street Journal, only to write down the asset by $2.8 billion less than two years later.

Another big Murdoch bet, social networking website Myspace, was bought for $580 million in 2005 and sold for $35 million a few weeks ago. And new ventures such as the Hulu video site or the Daily digital paper have yet to pay off.

Yet investors also say they have benefited when Murdoch has pushed against the grain successfully, such as his once ridiculed decisions to set up Fox News or to back BSkyB early on.

Another large News Corp investor said people still very much think of Murdoch as one and the same with News Corp, and the stock would drop considerably if anything were to happen to him.

Would someone else do a better job running News Corp than Rupert? "That's an unanswerable question. But it's also a moot point as I believe Rupert will run the company until he absolutely no longer can," said the investor, who also spoke on the condition of anonymity.

(Reporting by Yinka Adegoke and Herb Lash in New York, and Sarah McBride in San Francisco; Editing by Tiffany Wu, Bernard Orr)

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