NEW YORK (TheStreet) -- Before Rupert Murdoch's News of the World newspaper became mired in a phone hacking scandal in 2011, the company formerly known as News Corp. (NWSA) was eager to buy all of the shares of British Sky Broadcasting Group Plc it didn't already own.
But that nasty telephone hacking scandal emerged, and a chastened Murdoch was forced to appear in Parliament to apologize. And apologize he did. In the process, News Corp. withdrew its proposal to take full control of BSkyB.
Flash forward, and an energized 21st Century Fox (FOXA), freed of News Corp's slow-growth publishing assets , we're rising 3.1% to $35.21 Monday as BSkyB acknowledged it's in talks to acquire Fox's stake in the satellite carrier's operations in Germany and Italy. Well, that's a reverse from 2011, and Murdoch couldn't be happier.
"It is ironic, isn't is," Michael Nathanson, a media analyst at MoffettNathanson , said in a phone interview. "If not buying BSkyB got us to separating the company into two pieces, News Corp and Fox, then it was good fortune because you've got two streamlined companies that are better off because of it."
Though Fox would retain its 39% investment in BSkyB, the deal would remove BSkyB from Fox's continuing operations, assets that contribute to its operating income, allowing its executives to focus on the company's faster growing cable-TV networks as well as television and film studios.
"We've always thought Fox could create a lot of value by separating its high-value entertainment assets from its lower valued distribution assets," Brett Harriss, media analyst at Gabelli & Co., in a phone interview. "This deal would make Fox a pure play entertainment company."
Investors prefer cable-TV and broadcast networks to distribution businesses that are under pressure as younger viewers seek to get more of their news and entertainment from online streaming services. Cable-TV and broadcast generate higher margins, require less capital expenditure and are better poised to take advantage of faster growth in countries in Latin America, Eastern Europe and Asia, Harriss said.
"It's just same as the reason getting out of newspapers was a good move," Nathanson. "you're streamlining your executives' time."
The prospect of a deal with BSkyB follows Fox's first-quarter earnings announced on May 8 when shares jumped 6.5% after a better than-expected performance by the company's cable and broadcast networks as well as lower than anticipated costs at its broadcast and film studio. Fox, which had lost 8.7% in 2014 prior to its first-quarter earnings call is flat on the year. The S&P 500 Index
A deal with BSkyB would allow Fox executives to concentrate on its broadcast network, cable TV channels and film studios rather than having to operate a distribution network, especially a network in Italy which has struggled as the country's economy remains constrained by anemic growth. Fox currently owns 57% of Sky Deutschland and 100% of SkyItalia.
Furthermore, Fox investors could benefit as the company is likely to use the cash proceeds of a deal to repurchase its own shares, Harriss said.
"They're strategically complete," Harriss said. "They've got fantastic cable networks along with a leading position internationally for those networks, and their television and film studio is the best or one of the best. A deal with BSkyB would be a substantial positive."
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--Leon Lazaroff is TheStreet's deputy managing editor.
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