News Corp was unable to justify outbidding Cablevision's $650 million offer from an economic perspective. A News Corp spokesman said the deal was "uneconomical."
The decision leaves two known contenders for Newsday. Besides Cablevision, Mortimer Zuckerman, owner of the New York Daily News, a rival city tabloid to Murdoch's New York Post, also bid $580 million for the paper.
A Tribune spokesman declined to comment. A New York Daily News spokesman was not immediately available for comment.
News Corp's decision to walk away from Newsday is an unexpected twist in the three-way bidding war for the paper. Murdoch and Tribune Co Chief Executive Sam Zell had an agreement in principle to sell the paper to News Corp, with Tribune retaining a small stake to create a way to defer large capital gains taxes that a total sale would incur.
As recently as three days ago, Murdoch said on a conference call with investors to discuss News Corp's quarterly financial results that the deal with Zell was nearly done.
"I don't think Cablevision will prevail," Murdoch said, responding to a question about why he had not raised his bid, which he characterized as "competitively priced."
"Just be patient for a couple of days ... We're certainly not in the business of getting into an auction here," he said, adding that Newsday would add about $100 million in annual cash flow to News Corp.
"We're hoping to wrap it up within the next week. We think everything is in hand," he said.
Several blogs and news outlets reported later in the week, however, that Murdoch had backtracked from his earlier confidence about Newsday. Some quoted him at a dinner for Time magazine's "Time 100" issue as saying that the deal could take longer to work out than what he had said on Wednesday.
The 77-year-old media tycoon, who built News Corp from a pair of Australian newspapers into a global news and entertainment empire, realized a career-long ambition to buy The Wall Street Journal publisher Dow Jones & Co last year.
Murdoch had envisioned keeping Newsday separate from the New York Post, but combining their printing and distribution resources. Such a deal would have given News Corp advertising clients a way to reach affluent Long Island residents, and could have cut costs enough to help the Post turn a profit and potentially triumph over the New York Daily News in the city's tabloid wars.
"There's a lot we can do together," Murdoch said at the time.
Cablevision Systems Corp's $650 million-bid would be about seven times the paper's cash flow of $90 million in 2007, a figure mentioned by several sources familiar with Tribune's operations to Reuters in recent weeks. To go higher would show that News Corp was prepared to pay beyond that range to get the cost savings that it had envisioned for its New York holdings.
Such a deal might have run into questions from the company's shareholders, especially after some analysts had begun to question Murdoch's willingness to overpay for newspapers, which have been battered by falling advertising revenue and an exodus of readers from print editions to free Internet sites.
In addition, U.S. regulations restrict the number of papers and television stations that companies can own in the same geographic markets, presenting a potential problem for Murdoch, who owns TV stations and several newspapers in the New York City area.
It remains to be seen how this will affect the relationship between Murdoch and Zell, who have held discussions about working more closely together in different parts of the country. One possibility has been for Tribune to use its Florida and Southern California plants to print local editions of the Journal.