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With Disney deal looming, Murdoch’s empire is fractured

Rupert Murdoch, center, with sons James Murdoch, (R) and Lachlan Murdoch.
Getty Images
Rupert Murdoch, center, with sons James Murdoch, (R) and Lachlan Murdoch.

LOS ANGELES — In late summer, Verizon Communications came to Rupert Murdoch with a surprise acquisition offer.

Verizon — locked in battle with AT&T, which was then finalizing its $85.4 billion takeover of Time Warner — wanted to buy pieces of 21st Century Fox, Mr. Murdoch’s television and film conglomerate. Representatives of the two companies secretly met at least once to discuss a merger.

Mr. Murdoch, 86, shrugged off the talks as uninspiring, according to an associate, who spoke on the condition of anonymity because he wanted to maintain his access to the media titan. But Verizon’s overture prompted Mr. Murdoch to start to think seriously — for the first time — about selling his Hollywood treasures.

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Not only would a sale solve a business problem, it could solve a family one.

Several months later, Mr. Murdoch agreed to sell much of 21st Century Fox to the Walt Disney Company. The proposed $52.4 billion deal has the potential to radically reshape the entertainment world, but it also has many wondering what the future holds for Mr. Murdoch and the two sons who seemed to be on the cusp of taking over his vast media holdings.

Mr. Murdoch had built an empire by divining where media was headed, and the landscape ahead troubled him, according to several people who speak to Mr. Murdoch or to others close to him who insisted on anonymity. Growth for 21st Century Fox, with its mix of traditional cable networks and movie labels, would be increasingly difficult to deliver as technology giants like Apple and Amazon pushed deeper into the film and television industries, changing the way people access entertainment. Netflix was already becoming big enough to outbid Fox and other old-line entertainment companies for scripts. Facebook was coming after sports rights.

21st Century Fox had tried to bulk up to remain competitive. But its attempt to buy Time Warner in 2014 had failed. Its recent bid to become the sole owner of Sky, the British satellite television giant, has been stuck in purgatory. British regulators sai d in June that a sexual harassment scandal at Fox News had amounted to “significant corporate failures,” but added that Mr. Murdoch and his top lieutenants were “fit and proper” to hold broadcasting licenses in Britain. The British government is also weighing whether owning Sky would give the Murdochs too much control over British media.

In recent years, Mr. Murdoch had molded a succession plan that handed his businesses to both of his sons. In 2015, he named his eldest son, Lachlan, executive co-chairman, giving father and son equal standing. And he had installed his youngest son, James, as chief executive of 21st Century Fox. The trio would govern as one big happy family, they all insisted.

But at times, James had grumbled that his role as chief executive was limited, according to three people who know him who spoke on the condition of anonymity to discuss private conversations. His father did not relinquish much control and became more involved with the company’s most important asset, Fox News, after the cable channel’s pugnacious leader, Roger Ailes, was forced to resign in 2016 following allegations of sexual harassment. (Mr. Ailes died in May.)

Fox News, the company’s financial engine and a hugely influential platform for Republican politics, has been the source of family friction. James, who holds some progressive views, has privately expressed embarrassment about some elements of Fox News, including its sometimes skeptical coverage of climate change, according to the three people who are friendly with him, a stance not shared by his more conservative brother and father.

The tension bubbled into public in August when James sent an email to a list of blind-copied recipients that repudiated President Trump for his response to the violence in Charlottesville, Va. Mr. Trump counts Rupert Murdoch as a friend and informal adviser.

It was becoming increasingly clear to many analysts, investors and Hollywood agents that the three-pronged leadership structure Mr. Murdoch had put in place was not going to work over the long term.

The dynamics of the Murdoch family are continuously shifting and outsiders are kept at a distance. To Hollywood, the Disney deal looked like a family schism, with Lachlan, 46, solidly back in line to succeed his father as overseer of the family’s remaining businesses and James, 45, without a clear future at Disney. Associates of James, however, say that he encouraged the deal, in part because he had grown weary of the dysfunctional push and pull with his brother and father.

The Murdochs declined to be interviewed for this article.

When Rupert told his sons that Robert A. Iger, Disney’s chief executive, had called him to propose a takeover, James got on board rather quickly, according to four people briefed on the sale process. Like his father, James saw the merits of the proposed deal. Mr. Iger had expertly acquired Pixar, Marvel and Lucasfilm and used them to make Disney into a movie, theme park and consumer products juggernaut. Adding most of 21st Century Fox’s businesses would transform Disney into a colossus with a real shot at competing against the Silicon Valley giants. And the Murdoch family would be Disney’s biggest non-institutional shareholder. (Only the mutual fund company Vanguard has more shares.)

Disney’s offer also provided Rupert Murdoch with the opportunity to establish the like-minded Lachlan as his clear heir, putting him in a position to eventually take over Fox News, which Disney was not buying, and the family’s other company, the newspaper-focused News Corporation.

At first, Lachlan was unenthusiastic about discarding such a large chunk of the family’s holdings, according to the four people with knowledge of the sales process. Disney would take the 20th Century Fox movie and television studio, cable networks like National Geographic and FX and stakes in two behemoth overseas television-service providers, Sky of Britain and Star of India.

Lachlan understood the threat posed by the technology giants, but he saw less need to rush into Disney’s arms. Most of 21st Century Fox’s businesses were doing quite well. “There is a lot of talk about the growing importance of scale in the media industry,” Lachlan said on an earnings conference call with investors in early November. “Let me be very clear. Fox has the required scale.”

He had also just gotten his family settled in Los Angeles as part of the 2015 management arrangement. The primary property Disney was leaving behind — Fox News — was based in New York.

Although Lachlan has not yet made a decision, Rupert has made it clear that he wants his eldest son to run what they are calling New Fox, which will house Fox News and the other businesses left behind by Disney, including the Fox broadcast network and a chain of TV stations. “I hope my son Lachlan will agree to be chief executive,” Rupert said during an interview with Sky News in December.

That signals a return to his original succession plan, which went awry in 2005, when Lachlan abruptly left the family business after sparring with Mr. Ailes. He decamped to Australia, where he founded and ran a successful investment company. He returned to his father’s side in 2014.

“This may be his way of being immortal,” the London-based analyst Claire Enders, who has followed the Murdochs for more than three decades, said of Rupert, “because he clearly sees that Lachlan is the right person and shares his views and will support him for the next 10 years.”

What James will do is a more of a mystery.

People close to him say he may try to strike out on his own. Unlike his brother, James has never worked outside the family businesses, other than the hip-hop record label he founded after dropping out of Harvard. His father bought it, bringing James into the corporate fold.

A senior job at Disney is also a possibility, but there were “no guarantees of any sort,” Rupert said in the Sky News interview.

“He will be integral to helping us integrate these companies over the next number of months,” Mr. Iger said on a call with investors after the deal was announced. “Over that time, he and I will continue to discuss whether there is a role for him here or not.”

Beyond the family dynamics, the deal may allow James to finally be able to vanquish memories of his role in the phone-hacking scandal at family-owned tabloids in Britain. He was never found to have had direct knowledge of the hacking by members of the paper’s staff, but a parliamentary committee accused him of “willful ignorance” after he acknowledged that he had failed to read emails that referred to settlement payments made to hacking victims.

Moreover, James is likely to emerge with a stake in Disney worth at least $1 billion.

“That’s a good return for putting up with your father for 20 years,” Ms. Enders said.

As for Rupert Murdoch, he may now turn his attention to buying local television stations to buttress New Fox and compete with Sinclair Broadcast Group, which agreed in May to buy Tribune Media for $3.9 billion. If the proposed deal with Tribune Media goes through, Sinclair will reach some 70 percent of households in the United States. It has been suggested that Rupert could look at buying stations in political swing states, where there is a lot of money to be made in political advertising during election years, to say nothing of potential influence.

Some have also mused that Mr. Murdoch may try to combine New Fox with News Corporation, the owner of The Wall Street Journal and The New York Post. In his interview with Sky News, he brushed aside the immediate possibility. “There’s logic to it, but we’re not planning it at this stage,” he said.

In any case, Mario Gabelli, a longtime media investor whose Gamco holds roughly $350 million in 21st Century Fox shares, predicted that Rupert would relish having a voice at Disney, even if the deal did not come with a board seat.

“He now becomes Disney’s largest single shareholder,” Mr. Gabelli said, “with an ax to grind.”

Brooks Barnes reported from Los Angeles and Sydney Ember from New York.