Murdochs weigh break-up of media empire

Rupert Murdoch is not used to hoisting the white flag of surrender. Yet his willingness to explore a break-up of 21st Century Fox and discuss the sale of prime film and television assets to Walt Disney suggests that, at the age of 86, the media mogul may have lost his appetite for a fight.

The talks were initiated by Disney and its chief executive, Bob Iger, according to two people briefed on the discussions, and are no longer active. Yet by even entertaining the discussions, Mr Murdoch and his sons, Lachlan and James, have effectively put Fox on the block, a target for content-hungry companies such as Verizon, the telecoms group, and the John Malone-backed Charter Communications.

The Murdochs have started a process that could lead to the dismantling of a company that took decades to assemble. Without the scale offered by a combination with rival Time Warner - which rejected a Fox takeover offer three years ago - a break-up might be the best option.

The media landscape is already in a period of profound structural change. The global television and filmed entertainment market has been upended by Netflix and the growth of digital streaming. Advertising revenues are under pressure as viewers cut the cord, and cancel their subscriptions to multichannel cable operators. Once mighty media conglomerates are grappling with how best to respond.

For the Murdochs, this meant sitting down with a direct competitor. "You can't pre-emptively turn down an offer to create a larger more powerful company," says one person close to the discussions.

Still, the prospect of Mr Murdoch and his sons contemplating a sale of Fox's prized movie studio, cable channels and international investments - such as Sky - has stunned investors.

The sons took senior roles at Fox in 2015, when James became chief executive and Lachlan was appointed executive chairman, alongside his father.

"After the torch was passed from Rupert to James and Lachlan . . . Fox was set up to remain a family controlled company for the foreseeable future," Michael Nathanson, MoffettNathanson analyst wrote in a research note. "The likelihood that James and Lachlan would choose to sell down assets was not very high on the list of potential outcomes for the company."

People close to the talks, which were first reported by CNBC, confirmed that Fox's 39 per cent stake in Sky was among the assets included in the talks of a proposed sale to Disney.

Under those discussions, it would have been sold alongside the company's movie studio - and franchises such as X-Men - its 30 per cent stake in Hulu, the digital streaming platform, and award-winning cable network FX, the home of acclaimed dramas such as The People vs OJ Simpson.

Yet the Murdochs' apparent willingness to consider offloading its stake in Sky after many years and two bids spent wading through the regulatory mire in pursuit of a full takeover of the business has particularly puzzled analysts.

The talks come as 21st Century Fox faces regulatory scrutiny from the UK competition watchdog over its £11.7bn takeover of Sky, which has already drawn criticism from British politicians.

"You will not find the Murdochs selling a damn thing unless they are forced to - or humiliated politically," says Claire Enders, founder of Enders Analysis, the research firm. "They've never been sellers and don't need the money."

James Murdoch was particularly personally invested in acquiring Sky, she adds. "He has spent 10 years trying to buy it. [James] has always been a one-track guy."

Six years ago, the family's reputation took a knock from the phone-hacking scandal, which led to Rupert Murdoch apologising to MPs and the eventual withdrawal of its first Sky bid. "There are huge reputational advantages to James and the Murdochs of this [latest] deal clearing," Ms Enders says.

Amid the uncertainty of the talks with Disney - or other buyers coming forward for Fox - one person briefed on the discussions said that the Murdochs could also still become involved in pursuing deals to bolster their own business.

AT&T's attempted purchase of Time Warner hit a bump this week following reports that the US Department of Justice was considering suing to block the deal. US President Donald Trump is a vocal critic of CNN, Time Warner's news channel, which has led to speculation that he would try to block the takeover. If that transpires "Rupert could come back for Time Warner," said one person close to the Murdochs.

But a break-up of the Murdoch empire still seems the more likely option. Under the structure discussed with Disney, the Murdochs would be left with a US broadcast network and portfolio of sports rights, the Fox News Channel and a portfolio of newspapers in the UK, US and Australia, which are held within News Corp, which they also control.

Lacking the scale that would have come with a Time Warner acquisition, Rich Greenfield, analyst with BTIG Research, said that it was time for the Murdochs to bite the bullet on their interests in film and television entertainment.

"It is becoming increasingly obvious that the legacy media sector has entered secular decline . . . and television advertising is finally running out of steam as dollars shift more rapidly to digital," he wrote in a research note.

"Consumer behaviour is changing at a rate that no legacy media company is prepared to deal with and decades of over-earning are being disrupted by the internet. As headwinds rise, we believe the only way to maximise shareholder value is to sell."

Copyright The Financial Times Limited 2017