By Yinka Adegoke
(Reuters) - Rupert Murdoch's decision to become chief executive of a new, separate entertainment company split off from News Corp but not to head the new publishing business sparked speculation he was setting the stage for the return of his eldest son Lachlan as an executive at the company.
News Corp said on Thursday that its board had approved a plan for the $60 billion media conglomerate to be split into two publicly traded companies, publishing and entertainment, with the Murdoch family retaining control of both.
Analysts said that the separate publishing company, with some assets in Australia, lends credence to speculation over Lachlan Murdoch's return as an executive, given that it is widely known that he prefers Australia to the United States.
Should the break-up of the company be completed without the elder Murdoch or Lachlan in the chief executive role at the newspaper operation, it would mark the first time in News Corp's history that someone other than a Murdoch family member was in charge of that business.
But even if Lachlan did return or if someone else took the CEO role, Murdoch, who loves the newspaper business, has already said he would be an "active chairman" of the publishing unit.
"With Rupert Murdoch you can have the title on your business card, but you know who's really in charge," said Ken Doctor, a media analyst at Outsell. "He doesn't want to run it he just wants to tell them what to do."
In an interview on Thursday with Reuters, Murdoch, who will serve as chairman of both companies, said he would be pleased to have Lachlan back.
Lachlan Murdoch, who was deputy chief operating officer at News Corp, left the company in 2005 after clashes with senior executives. He has remained on the board but has been reluctant to return to the company's headquarters in New York.
"He's got his hands full with his own businesses at the moment, but as a father I hope he'll return. He spent his life at my knees as we built this company so we shall see," Murdoch told Reuters.
However, in an interview on News Corp's Fox Business Network on Thursday, Murdoch moved to dismiss some of the speculation, saying it was "highly unlikely" Lachlan would return to the company as a publishing executive.
Another likely contender to run the new publishing company is News Corp executive Joel Klein, a former New York City schools chancellor.
Meanwhile, Rupert Murdoch will remain CEO of the new, faster-growing entertainment company, with long-serving lieutenant Chase Carey remaining as chief operating officer.
But the executives jockeying for key roles at the family- controlled businesses under Murdoch and Carey is expected to be intense.
Company insiders are already raising questions about what roles Murdoch's children Elisabeth and James -- both senior entertainment executives -- will play within the new company and what that will mean for a succession plan to the 81-year-old patriarch.
James Murdoch, who has been embroiled in the UK phone hacking scandal from his previous role as chairman of News International, currently oversees the international TV business. He is also a director of the company. His older sister Elisabeth runs a News Corp-owned TV production company out of Los Angeles. Last year, she declined to join the board as the phone hacking scandal escalated.
Top Fox executives, including Peter Rice and Kevin Reilly, will also be expected to be fit into senior hierarchy at the entertainment business.
"I think it shows what a rich company we are to have so much talent," Murdoch told Reuters. He said the issue of succession will be addressed by the board. "This move does not affect succession thinking at all."
BREAKING UP 60-YEAR OLD COMPANY
Murdoch said his mind had been made up for some time on the decision to break up his 60-year-old company.
"It's a very big move and very big decision for me," he said on a conference call. It's a reversal from his long-held belief that News Corp's assets worked best as a cohesive whole.
The transaction is expected to take about 12 months to complete. News Corp shareholders will receive one share of common stock in both new companies for each of the same class of News Corp shares currently held.
Asked by analysts what obstacles may impede the split's progress, Murdoch jokingly replied, "lawyers."
Both of the new companies will maintain the current dual class share structure that gives the Murdoch family the largest block of voting shares.
The entertainment company will include News Corp's Fox broadcasting and cable networks, 20th Century Fox movie studios and pay-TV businesses in Europe and India.
Analysts expect a standalone entertainment unit to be valued at $52 billion, or $23 per share, based on an 8 times cash flow multiple.
The publishing company will include newspapers like The Wall Street Journal and Britain's The Sun, book publisher HarperCollins, an integrated marketing business as well as its fledgling digital education division.
Publishing, including integrated marketing services, accounts for around 7 percent of News Corp's enterprise value, according to analysts at Barclays Capital. It estimates that publishing represents 24 percent of revenues and around 11 percent of operating income.
Analysts estimate that an independent publishing division would generate about $1.3 billion in EBITDA at a multiple valuation of 6 times, or $3.25 per share.
Chief Financial Officer Dave Devoe told Reuters the company had decided that splitting the company would give shareholders the best return over options like selling assets or taking it private.
Murdoch told CNBC the publishing unit would consider changing the name of The Wall Street Journal to WSJ as the company makes a push to make the U.S. paper more of a global brand.
Analysts and investors have been skeptical about whether the struggling publishing business could prosper as a standalone. Murdoch addressed the concerns in a memo Thursday to his staff, which was obtained by Reuters.
"Our publishing businesses are greatly undervalued by the skeptics. Through this transformation we will unleash their real potential," he said.
There has been mounting pressure on News Corp to get rid of its newspaper business after a phone-hacking scandal tainted its British papers and forced the company to drop its proposed acquisition of pay-TV group BSkyB.
Since the collapse of the BSkyB deal, News Corp has implemented a share buyback program totaling $10 billion. And Murdoch insisted the company has "moved on" from any thought of returning to the deal or making any major new investments in Britain anytime soon.
"There were billions and billions of dollars and Britain didn't want them and we've got good places to put them here (United States)," Murdoch told Fox Business News. "I'm much more bullish about America than I am about England."
Chief Financial Officer Dave Devoe said the buyback program will not be affected by the separation. News Corp shares have risen more than 43 percent since the program was implemented last July.
News Corp shares closed down 1.4 percent at $21.99 on the Nasdaq Thursday.
"This is very shareholder friendly. News Corp is a very complex stock," said Larry Haverty, a portfolio manager at Gabelli Multimedia Funds, which owns News Corp stock.
He said the stock will benefit from a reduction in the so-called ‘Murdoch discount," which referred to Murdoch's reluctance to take any notice of shareholders desires.
Murdoch insisted the decision to separate the business had nothing to do with the British scandal.
"We're not doing this any way as a reaction to anything in Britain," Murdoch said.
In addition to the scandal, newspapers in particular, and publishing in general, has been badly hurt by the availability of free content on the Internet - leading to a drop in advertising revenue and circulation sales.
Murdoch has argued that consumers will pay for digital news particularly on devices like tablets and phones if it is not given away for free.
(Reporting by Yinka Adegoke; additional reporting by Nicola Leske; editing by Peter Lauria, Bernadette Baum, Jeffrey Benkoe and Bernard Orr)