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Wall Street remains wary of News Corp.

Ditching the BSkyB bid fails to abate worry that the scandal enveloping Rupert Murdoch's media conglomerate will continue to spread.

July 13, 2011|By Meg James and Dawn C. Chmielewski, Los Angeles Times
  • News Corp. has dropped its bid to buy the 61% of British broadcaster BSkyB it doesnt own. Above, the Sky News logo is seen on TV screens in a store in Edinburgh, England.
News Corp. has dropped its bid to buy the 61% of British broadcaster BSkyB… (David Moir, Reuters )

News Corp.'s decision to ditch its $12-billion bid for Britain's largest pay-television service was greeted with guarded optimism on Wall Street yet did little to ease nagging uncertainty about whether the widening phone hacking scandal will reveal other explosive details.

Shares of Rupert Murdoch's media conglomerate — beaten down as much as 16% in the last two weeks — gained 4% on Wednesday to $15.93 as investors hoped that giving up its bid for all of British Sky Broadcasting would free up cash.

But Wall Street remained wary.

"If you are an investor, you don't know where the bottom of this thing is, and what other revelations are out there," said Doug Creutz of the investment bank Cowen & Co. "Until the British police's investigation is complete — and that will take months — there will be an overhang on News Corp. stock."

On Tuesday, News Corp. appeased investors by announcing it would buy back $5 billion worth of stock.

Analysts speculated that the phone hacking scandal might curb Murdoch's appetite for big acquisitions — at least in the short term.

Investors long have complained that Murdoch squanders capital on pricey and nonessential purchases at inflated prices. Examples include buying social network Myspace, an education-related company and the Wall Street Journal.

The scandal has opened the door for critics of Murdoch and his operations, including the politically influential right-leaning Fox News Channel.

Members of Congress, including Sen. Barbara Boxer, a California Democrat, called on federal regulators Wednesday to scrutinize Murdoch's operations to determine whether News Corp., based in New York, violated the Foreign Corrupt Practices Act by allegedly bribing police officers to gain access to private phone records. They also wanted to find out whether any U.S. citizens had been victimized.

In addition to listening to messages left on cellphones of a slain British schoolgirl, royal family members and government officials, there have been claims that reporters for Murdoch's newspapers, hungry for scoops, tried to obtain the phone numbers of people killed in the 2001 World Trade Center and Pentagon terrorist attacks.

A News Corp. spokeswoman declined to comment.

Some Wall Street analysts had viewed the phone hacking scandal as a potential land mine, but few could have predicted the firestorm of events that unfolded during the last week.

A week ago, Murdoch's son and heir apparent, James Murdoch, announced that News Corp.'s British subsidiary News International would close the 168-year-old News of the World tabloid because the scandal had irrevocably stained its reputation.

The Sunday tabloid was the Australian-born Rupert Murdoch's first acquisition in Britain. He bought the paper in 1969, a tactical move that allowed him to begin amassing political clout in Europe.

Until Wednesday, Murdoch and his News Corp. lieutenants had aggressively pressed on with their bid to buy the 61% of BSkyB that News Corp. does not own. BSkyB, the British equivalent of U.S. cable giant Comcast Corp. or DirecTV, provides television service to 10.2 million customers and owns a stable of popular sports, news and entertainment channels.

BSkyB would have provided News Corp. with a predictable — and growing — revenue stream and reduced the company's reliance on more dodgy advertising dollars. For the first nine months of BSkyB's most recent fiscal year, it reported an operating profit of $1.27 billion. Owning the service outright would have steered those dollars straight to News Corp.'s bottom line.

"They did everything they could to save the BSkyB bid — and that didn't work and now they are doing everything that they can do to save the company's management," Creutz said. "If you are Rupert Murdoch, then at the top of that list is his son James."

The 80-year-old Murdoch has long said that he wanted one of his adult children to eventually run News Corp. The scandal, said longtime media analyst Harold Vogel, "throws a harsh spotlight on succession issues. That has never really been clarified or resolved to anybody's satisfaction on the outside."

Three of Murdoch's adult children — Elisabeth, Lachlan and James — all serve as directors on News Corp.'s board. For awhile, Murdoch seemed to be grooming Lachlan to take the mantle, but Lachlan left the company and returned to Australia in 2005.

This spring, News Corp. paid nearly $675 million to buy Elisabeth Murdoch's British television production company, Shine, prompting a lawsuit by a small group of institutional investors who allege that nepotism is rife within News Corp. and that Murdoch runs the company as his "own private fiefdom."

Murdoch in March elevated 38-year-old James to deputy chief operating officer, the No. 3 position in the company. Since 2007, James Murdoch had managed News Corp.'s Asian and European operations, putting him in charge of News International shortly after the phone hacking scandal first broke.

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