Rupert Murdoch has finally bowed to the demands of frustrated shareholders and conceded that News Corporation, the worldwide media empire he constructed, may have to be split in two after the phone-hacking scandal tarnished the reputation of his newspaper division.
The move would be the biggest corporate upheaval in the history of the group, over which Murdoch and his family have retained a tight grip since he established it in 1979.
Murdoch has for years fought off calls to hive off News Corp's publishing assets – including its scandal-hit UK newspapers – from its film and TV businesses.
But the crisis that caused the closure of the News of the World and resulted in the Murdoch clan being called before the British parliament was the last straw for shareholders, who ratcheted up the pressure on the News Corp board in a bid to achieve a higher stock market valuation for the non-newspaper assets.
The company was forced to confirm the news after a leak to the Wall Street Journal, which it owns. It said in a brief statement issued in New York: "News Corporation confirmed today that it is considering a restructuring to separate its business into two distinct publicly traded companies."
No further details were forthcoming, but analysts expect that News Corp's Fox TV network and Twentieth Century Fox film studio would form the heart of the more profitable new company. Those businesses accounted for $23.5bn (£15.1bn) in revenue in the year ended in June 2011.
The publishing arm would include News International's UK papers – the Times, Sunday Times and the Sun – the WSJ, the New York Post, The Australian and the book publisher, HarperCollins. Those assets generated $8.8bn (£5.6bn) in the same period.
Editors and executives from around the world gathered in New York on Tuesday to hear plans for the restructure, which comes ahead of a decision by the UK media regulator Ofcom on whether News Corporation is a "fit and proper" business to control BSkyB. News Corp may feel that splitting off its newspaper division could influence that decision, which will come before the Olympics start on 27 July.
But competition lawyers in London cautioned that the split may still not satisfy regulators. Becket McGrath, partner at Edwards Wildman Palmer and a former Office of Fair Trading director, said: "The presumption is that separating the newspapers and TV/entertainment operations into two businesses will not make any difference to a plurality analysis if there was another attempt to takeover BSkyB. The two [new] businesses would still be treated as one group, because according to the [WSJ] report News Corporation will retain a 40% share in both operations."
Nonetheless, News Corp shareholders reacted positively to the news. News Corp's share price rose by about 6%, to just over $21.50 in the hour after the announcement at 9.45am local time in New York.
Clare Enders, founder of the media research company Enders Analysis, said the move could amount to a "seismic" change for the British newspapers and the thousands of staff in Wapping in east London. "Splitting off a business that is close to Rupert Murdoch's heart and represents the foundation of the company's original wealth is historic," she said. "Essentially the causality of this is driven by the view that the newspaper issues in the UK here are dragging down the valuation of the company's TV assets, which have had an outstanding year. This is despite the fact that company stock has gone up by more than 50% in the last year despite the phone hacking."
Rich Greenfield, media analyst at BTIG, said it was a "stunning" move. "It's hard not to be very excited about this," he said. He said even before the hacking scandal investors had been "scared and frustrated" by Murdoch's attachment to News Corp's publishing business.
The main reason for the division – even if prompted by the hacking scandal – centres on bids to improve stock value at a time when shareholders have been increasingly critical of the News Corp board.
The hacking scandal scuttled News Corp's plans to take full control of BSkyB, the British pay-TV giant in which it is the major shareholder. But legal experts said the split is unlikely to make a fresh bid any easier if, as reported, News Corp retained control of both businesses, they would be treated as one group in any plurality test.
Shareholder groups said they would press for the Murdochs to loosen their grip on the companies.
"News Corp should take this opportunity to create the highest level of corporate governance," said Julie Tanner of Christian Brothers Investment Services, who led a shareholder revolt against Murdoch at last year's annual general meeting. Last year major shareholders voted against the re-election of the majority of News Corp's board members and called for Murdoch – whose roots in newspapers go back to 1952 when he inherited a small newspaper group in Australia from his father – to step down as chairman. James Murdoch, once Rupert's heir apparent, has resigned from the board of News International and Sky.
News Corp's chief operating officer, Chase Carey, said earlier this year that the company's management team had considered a split. But at the time, he said, no decision had been made.
David Joyce, media analyst at Miller Tabak, said the move would still leave News Corp facing the full consequences of a US government investigation into the hacking scandal.
"I don't think there is any way that they can legally separate themselves from that," he said.
But he said the move would be welcomed by investors who have long pushed for a split. "The phone-hacking scandal has really made this company open up to new ways of thinking. This is a very good move," he said.