By Sarah Rabil and Joe Flint 

By selling the bulk of his entertainment assets to Walt Disney Co., media titan Rupert Murdoch is making a calculation about changing winds in the media industry, while doubling down on news and sports.

21st Century Fox agreed to sell its film and television studio, international distribution assets and some cable networks to Disney for $52.4 billion. That leaves the remaining Fox company with assets including the Fox News and Fox Business cable news networks, the FS1 cable sports channel, the Big Ten Network and a television broadcasting business that consists of 28 local TV stations and the Fox broadcast network, which carries college and professional football as well as baseball games.

The transaction, announced Thursday, marks the end of an era for 86-year-old billionaire Mr. Murdoch, 21st Century Fox's executive chairman who built the entertainment business over decades and who has long been considered a buyer and creator of assets around the globe.

Wall Street was stunned in recent weeks that Mr. Murdoch would consider selling a huge chunk of his company to a rival, particularly after elevating his sons to top leadership roles only two years ago.

But the Murdochs, who control 39% of 21st Century Fox's voting shares, have argued that the remaining company will be more nimble and focused, with must-watch television properties that drive live viewing as new technologies and changing consumer behaviors are rapidly shifting the media landscape.

"I know a lot of you are wondering, 'Why are the Murdochs making such a momentous decision? Are we retreating?' Absolutely not," Mr. Murdoch said on a call with analysts Thursday. "We are pivoting at a pivotal moment."

Because 21st Century Fox shareholders will end up owning 25% of Disney after the all-stock transaction, the Murdochs have positioned the deal as a way for investors to benefit from Disney's giant content machine and bolstered efforts to deliver entertainment direct to consumers.

Shareholders also will remain invested in an entrepreneurial television company with strong cash flow, they said. 21st Century Fox shareholders will retain their existing ownership of the spun-off Fox.

"While the merged business [with Disney] is about scale, the new Fox is about returning to our roots as a lean, aggressive challenger brand, focused at the beginning on must-watch news and live sports," said Lachlan Murdoch, who is executive co-chairman alongside his father.

The sale to Disney marks a further fragmentation of the Murdoch media empire 4 1/2 years after News Corp. was split, with entertainment assets going to 21st Century Fox and newspapers and book publishing going into a new News Corp, minus the period.

There may now be an opportunity for a future reunion. The Murdoch family maintained a roughly 39% voting stake in each company after the 2013 split. People familiar with the matter say Rupert Murdoch has contemplated eventually merging the remaining Fox assets with News Corp, which owns The Wall Street Journal, newspapers in the U.K. and Australia, book publisher HarperCollins and digital real-estate businesses.

Such a merger is unlikely in the near term given complexities including how to manage the potential tax bill, the people say.

When asked in an interview Thursday on Fox Business whether he plans such a recombination, Mr. Murdoch said: "I don't know. Ideally, yes, but I think that's years away. We'll have to think about that."

The company, for now being referred to as new "Fox" as it sheds the Twentieth Century Fox studio from which it derived its name, will have about $9 billion in debt, $10 billion in annual revenue and $2.8 billion of earnings before interest, taxes, depreciation and amortization.

The breakup of 21st Century Fox comes with trade-offs. The new Fox will primarily draw revenue from fees paid by TV distributors and advertising sales, leaving it more exposed to the shifting television landscape where cord-cutting and new streaming competitors have reduced ratings and pay-TV subscribers.

Also, the Fox broadcast network will be severed from the Twentieth Century Fox television studio, which produces most of its shows. Fox, like other networks, has been aggressively trying to own as much of its content as possible to capitalize on revenue from reruns, streaming and international sales.

"We can make our own programs," Rupert Murdoch said on the call. Fox will still buy from Twentieth Century Fox Television, and independent studios such as Warner Bros. and Sony "will be looking to us to buy programs," he said.

Fox is holding on to its studio lot in Los Angeles, and its sound stages could still produce TV shows for other companies, including streaming players, a person familiar with the situation said.

The Fox network has been struggling for years. Sports rights help Fox command significant carriage fees from pay-TV distributors and its own affiliates, but if its entertainment ratings sink further, maintaining that leverage could be a challenge.

While the company will still hold lucrative rights to air National Football League, college football and Major League Baseball games across Fox broadcast, Fox Sports 1 and the Big Ten Network, Fox is parting with a portfolio of regional sports networks that bring in annual Ebitda of $2.3 billion, according to estimates from MoffettNathanson.

The leadership and management structure of the new Fox is still being figured out, Lachlan Murdoch said on the call.

Some analysts are predicting the leaner Fox could pursue its own acquisitions.

After the sale to Disney, Fox will have a balance sheet that is no longer tied up by the pending purchase of U.K. pay-TV giant Sky PLC. Meanwhile, the Federal Communications Commission is working to change the ownership caps on local TV stations that could pave the way for station owners like Fox to pursue more acquisitions, according to Brian Wieser, an analyst at Pivotal Research.

The FCC also recently revised longstanding limits on ownership of TV stations and newspapers, meaning that if Fox recombined with News Corp, the company may buy more newspapers in the U.S., according to Mr. Wieser.

Write to Sarah Rabil at Sarah.Rabil@wsj.com and Joe Flint at joe.flint@wsj.com

 

(END) Dow Jones Newswires

December 14, 2017 14:56 ET (19:56 GMT)

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