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Charges against Rebekah Brooks and testimony from her and other former senior figures in Rupert Murdoch’s UK newspaper empire have kept the British media and political establishment glued again to investigations into the press over the past week.
Yet investors in Mr Murdoch’s $50bn television, film and publishing group, have paid little attention, instead sending News Corp shares to their highest levels since 2008.
Last week’s 5 per cent jump was a reaction to news that the company was doubling the $5bn share buyback programme it unveiled last July as the scandal forced it to shut the News of the World and abandon its $12bn-plus pursuit of British Sky Broadcasting.
It was also a reminder that, whatever happens next in the unfolding drama, Mr Murdoch has two important points in his favour. The first is that the cable TV networks that provide 60 per cent of News Corp’s operating income are growing even faster than the costs associated with UK investigations.
In its quarterly results last Wednesday, the group unveiled a 15 per cent or $111m gain in operating profit from the cable division behind Fox News, FX and Asia’s Star TV. That outweighed a further $63m in charges from the hacking debacle, and a $31m quarterly decline in underlying publishing profits.
Mr Murdoch’s second is the cash those operations are producing – a net $2.7bn in the last quarter alone. Even after spending $3.3bn buying back shares, it ended the period with $10.7bn of cash on a balance sheet with $15.2bn of borrowings.
The obvious place to spend that cash, it might seem, would be on buying back the 60.1 per cent of BSkyB it does not own – a move News Corp broached in 2010.
But events have highlighted a quandary for Mr Murdoch. The Leveson Inquiry noted the “political frisson” surrounding his UK deals, and the focus on his influence over British politics has made a repeat approach for BSkyB look much harder.
“M&A at BSkyB is clearly not likely in the near term,” says Thomas Singlehurst, analyst at Citigroup, predicting that politicians would want to wait until the Leveson Inquiry and criminal investigations are over before considering any new bid.
One London analyst who declined to be named says he saw no chance for a BSkyB bid in the next 10 years. “At this point, the British political establishment wants to drive a stake through Rupert Murdoch’s heart,” he adds. Chris Goodall, an analyst with Enders Analysis and former member of the Competition Commission, puts it in more measured terms, saying the secretary of state of state for media would have no alternative but to refer a new bid to the commission.
The Commission might well approve the deal with limited conditions, he says, leaving the minister with little choice but to agree. “So, in sum, I can see some circumstances when News Corp could launch a successful bid within a few months, however strange this might look,” Mr Goodall says.
First, however, News Corp must find out whether Ofcom, the media regulator, deems BSkyB – and News Corp as a controlling shareholder – a “fit and proper” owner of broadcast licences. Any objections to News Corp’s role could be resolved by James Murdoch resigning from BSkyB’s board and “by Ofcom giving News Corp a dressing down” and a chance to show News International’s scandals had not infected BSkyB, Mr Goodall says.
BSkyB executives have been distancing themselves from their biggest shareholder, but buying BSkyB still has a twofold appeal to News Corp. First, it could consolidate BSkyB’s cash flows. Second, it could find savings such as joint bidding for sports rights with the wholly-owned Sky Italia and part-owned Sky Deutschland.
Mr Murdoch told the Leveson Inquiry that he had hoped to “put [BSkyB] together with Sky Deutschland and Sky Italia.” If Ofcom forced News Corp to sell its BSkyB stake, by contrast, investors would ask what sense Sky Italia and Sky Deutschland make without it. Bankers and analysts struggle to think of an obvious strategic buyer for the $7bn BSkyB stake.
Should Ofcom clear News Corp, analysts and bankers add that a bid for the rest of BSkyB is difficult unless he sells his newspaper interests. Even as the Leveson Inquiry debates what Mr Murdoch called the myth of his papers’ political clout, they have begun to look like obstacles to such a deal rather than assets whose influence ensures a favourable regulatory climate.
If News Corp got out of UK newspapers, “the question then would be on what basis the regulator or political establishment could block a deal,” Citi’s Mr Singlehurst says.
A newspaper spin-off would please News Corp investors. Chase Carey, chief operating officer, told analysts last week that the board was aware of this but was focused on improving results at its publishing business.
While it would rather own BSkyB outright or “monetise” its stake, he added: “We’re not expecting in the short to medium term to be doing anything other than maintaining our interest.”
But if Mr Murdoch has to choose between the UK newspaper empire he began building more than 40 years ago and the TV business he bet his company on more than 20 years ago, it will be an emotional choice.
“One night in the hands of the bankers I actually mortgaged my own apartment in New York” to fund BSkyB, he reminded the Leveson Inquiry. Now the risk comes from regulators and investigators rather than from his balance sheet.