The media conglomerate did not specify Tuesday which businesses each company would contain, although The Wall Street Journal reported Monday that the company is considering separating the newspaper and book publishing businesses from the entertainment arm.
News Corp.'s entertainment business is far more profitable. It accounted for about 75 percent of the company's revenue and nearly all of the operating profit in the first nine months of the fiscal year, which ends this coming Saturday.
Bernstein analyst Todd Juenger said in a research note that the split would allow the company to invest more in the growing entertainment field "without the baggage of publishing."
A former News Corp. executive familiar with internal company deliberations says such a split has been talked about for years, although discussions gained new momentum in the wake of the phone-hacking scandal, which erupted last July.
The former executive, who spoke on condition of anonymity in order to speak candidly about internal company deliberations, said no final decision has been made.
Evercore Partners analyst Alan Gould said that without the publishing assets, revenue growth at the bigger TV and movie entity would nearly double to about 7 percent a year.
It is unclear if the spun-off publishing unit would also bear the legal costs of the U.K. probe. In the first nine months of the fiscal year, probe costs have totaled $167 million.
The point of a split is not to create a smaller company "that would just wither and die," said Tom Eagan, an analyst with Canaccord Genuity. It would have to contain enough profitable businesses to attract investors.
Eagan pointed to the successful spin-off of cable TV giant Time Warner Cable Inc. from the entertainment company Time Warner Inc. in March 2009. Because the cable division was more willing to pay out dividends and buy back shares, its stock price has more than tripled since then. Meanwhile, Time Warner Inc.'s stock price has doubled.
Time Warner shareholders were granted stakes in both separated companies and likely fared better than if the company hadn't split, Eagan said.
So-called conglomerates that combine disparate businesses in one company were once popular. But the fashion for many years has been to slim down and simplify.
Motorola recently spun off its cellphone unit. Sara Lee Corp. is creating a new public company from its European coffee and tea business. Kraft Foods Inc. is also splitting in two — one for North American brands like Velveeta and one for Cadbury chocolates and other global snacks.
The problem for News Corp. isn't just that newspapers and books make less money than television and film. It's also that investors value the earnings from each differently. They are willing to pay less for a single dollar of earnings from the former than they are for a single dollar of earnings from the latter.
On Monday, investors buying News Corp. stock were paying the equivalent of $5.80 for every $1 of operating earnings that the combined company is expected to generate this year, according to Gould. That's 20 percent lower, or $1.50 less, than investors are paying for more pure play TV and film companies like CBS Corp. and Viacom Inc.
Do the math on News Corp.'s expected $6 billion in operating earnings this year, and that means the company is being valued $9 billion less than its TV and film rivals. Gould says the idea behind the split is to capture some of that $9 billion. He believes the company could do it and is recommending that his investing clients buy the stock.
Business Writer Bernard Condon in New York and Associated Press writer Raphael Satter in London contributed to this report.
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