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LONDON/NEW YORK March 26 (Reuters) - Rupert Murdoch has returned eldest son Lachlan to the leadership of his media empire and promoted younger son James, setting them up to succeed the 83-year-old tycoon.
Lachlan, 42, will become non-executive co-chairman of both entertainment company 21st Century Fox and publishing operation News Corp, sharing both roles with his father. He rejoins the company after quitting as deputy chief operating officer nearly 10 years ago amid friction with other News Corp executives.
James, 41, will become Fox's co-chief operating officer alongside longtime Murdoch stalwart Chase Carey, the latest step in the younger son's comeback after he was forced to relinquish some roles during a phone hacking scandal in Britain.
"I think it underlines the fact that it remains a family dynasty in spite of being a listed company," media commentator and former Murdoch editor Roy Greenslade said in a telephone interview. "The two boys are being prepared to inherit."
Both sons have at various times been seen as the heir apparent to their father, and it remains to be seen whether they will be able to work together when Murdoch finally hands over the companies.
The Murdoch family controls both Fox and News Corp through a trust that has a 38 percent ownership stake of Class B shares with voting rights.
"If there is any surprise, perhaps it's bringing Lachlan back into Fox," Evercore analyst Alan Gould said in a telephone interview. "I would assume it does set up a little bit of a bake-off as to who will ultimately succeed at Fox."
It was largely expected that Lachlan might return to the newspaper and publishing arm of his father's empire - which includes the Wall Street Journal, Australian newspaper and TV assets, and book publisher HarperCollins - once News Corp split into two separate businesses in 2013. Fox operates the movie studios, TV and cable properties.
The announcement of Lachlan's return is a boost to Murdoch, who has always said he would like his children to be involved in the running of his sprawling media conglomerate.
"Lachlan is a strategic and talented executive with a rich knowledge of our businesses," his father said in a statement.
"James has done an outstanding job driving our global television businesses," Murdoch added.
"Our collective future has never been brighter."
The question of who will replace Murdoch has been a game among media watchers who have seen his children jockey in and out of position over the years.
Daughter Elisabeth, who like Lachlan and James is a child of Murdoch's second marriage to Anna Murdoch Mann, founded and sold her television business Shine Group to News Corp in 2011.
She was set to become a board director at the company in 2011 before the corporate split but decided not to pursue the nomination following the furor over the hacking scandal.
Lachlan had been expected to succeed his father at the helm of Murdoch's businesses but in 2005 suddenly stepped down from his role as deputy chief operating officer of News Corp after clashing with his father's executives in New York.
James had replaced Lachlan as the favourite to one day take over from Murdoch when he became deputy chief operating officer of the old News Corp in 2011.
But his reputation was damaged by the fallout from the scandal at Britain's News of the World Sunday tabloid, where some staffers hacked into voicemail messages for stories.
James, who had also been the head of the British newspaper arm, eventually stepped down as chairman of British pay-TV company BSkyB, where he built his career, saying he did not want to act as a lightning rod for the wider hacking scandal.
All of Murdoch's four adult children including Prudence, his only child from his first marriage, hold voting rights in the trust. Murdoch's two young daughters from his marriage to Wendi Deng, Grace and Chloe, hold shares in the trust but no voting rights.
Murdoch and Deng divorced in 2013 after 14 years of marriage,
Fox said on Wednesday that Lachlan would split his time between his home in Sydney and News Corp's offices in New York and work with senior management to develop the businesses - roles more commonly associated with an executive position despite his new non-executive chairman title.
During his time away from the head office, Lachlan had remained as a director at News Corp and Fox. He had also focused on interests in Australia through his private investment company Illyria Pty Ltd, which owns various media assets.
He also until recently served as non-executive chairman of Australian TV network Ten Network Holdings, whose shares are down 72 percent over the past three years.
In his new role, James will have direct responsibility for Fox Networks Group, the firm's broadcast and cable channels business in the United States, as well as strategic oversight of Fox's businesses in Europe, Asia and the Middle East.
James will continue to report to Carey.
"As long as Chase Carey is still there and continues to run the cable networks, that is critical," said Evercore's Gould, adding that Carey is one of the best operating officers in the industry.
Still, it remains to be seen if Carey will stay with the company long-term, since his contract is up for renewal this June 30.
A Fox spokesman said in a statement that the company is in the process of finalizing Carey's extended employment agreement. "We are confident it will be completed shortly," he said.
Before Wednesday's promotion, James had been Fox`s deputy chief operating officer, as well as chairman and CEO of its international arm.
"It is every investors' expectation that at some point one of Rupert's kids will succeed him," Gould said. (Additional reporting by Paul Sandle in London, Arnab Sen in Bangalore and Lincoln Feast in Sydney; Editing by Joyjeet Das, Christopher Cushing, Mark Potter and Jonathan Oatis)