Bloomberg News

Rupert Murdoch Regretting BSkyB IPO Seen Risking the Rest

May 02, 2012

Rupert Murdoch, chief executive officer of News Corp., in New York. Photographer: Jonathan Fickies/Bloomberg

Rupert Murdoch, chief executive officer of News Corp., in New York. Photographer: Jonathan Fickies/Bloomberg

Rupert Murdoch said last week he regretted the 1994 initial public offering of British Sky Broadcasting Group Plc (BSY), which reduced News Corp. (NWSA:US)’s control. Now its remaining 39 percent holding in the U.K.’s biggest pay-TV company may be slipping further from his grasp.

As U.K. regulator Ofcom steps up its probe into whether News Corp. and its executives are “fit and proper” to hold a broadcasting license following a phone-hacking scandal, lawmakers ruled yesterday that Murdoch is not “fit” to run a company. The findings could prompt the 81-year-old News Corp. chairman to lower his BSkyB stake or sell the whole thing, said Sanford C Bernstein analyst Claudio Aspesi.

“I would not be surprised to see them decide that their best option is to divest altogether from it,” said Aspesi, who has an “underperform” rating on BSkyB stock.

Murdoch last year abandoned a 7.8 billion-pound ($12.6 billion) bid for the rest of BSkyB, which he built into one of his most profitable units, after employees of News Corp.’s U.K. publishing unit hacked into the phones of politicians and celebrities for exclusive stories. By echoing Ofcom’s own investigation, the U.K. lawmakers cast doubt on whether News Corp. will be able to even hold onto the current stake.

Murdoch “exhibited willful blindness to what was going on in his companies and publications,” the House of Commons Culture Committee said in a report that split lawmakers along party lines on critical findings. “This culture, we consider, permeated from the top.”

Cash Benefit

James Murdoch, who was chief executive officer of BSkyB from 2003 to 2007, last month stepped down as chairman of the broadcaster because of the phone-hacking scandal. Tom Mockridge, who replaced Rebekah Brooks as CEO of the News International U.K. unit, was named deputy chairman of BSkyB.

Controlling BSkyB would have given News Corp. access to the company’s cash, allowing it to expand further. The Isleworth, England-based company had free cash flow of 869 million pounds at the end of fiscal 2011.

BSkyB today said earnings before interest, taxes, depreciation and amortization rose 20 percent in the first nine months as it gained more broadband clients.

The stock rose 10.5 pence, or 1.5 percent, to 701.5 pence at the close of trading in London. News Corp. added 0.5 percent to $19.89 at 12:23 p.m. in New York.

BSKyB, with more than 10 million customers, has altered its strategy amid slowing subscriber growth and is focusing on selling high-definition TV services alongside Internet broadband and telephone subscriptions to existing users.

A News Corp. spokeswoman said the company remains a committed long-term BSkyB shareholder.

Rupert Regrets

The value of News Corp.’s BSkyB holding has more than doubled since the London-based company’s IPO on Dec. 8, 1994. The shares have also outperformed those of News Corp., which dropped by 7.7 percent in the last five years. In contrast, BSkyB rose 21 percent in London.

While the share sale paid off financially, Murdoch said he regretted giving up some control.

“With hindsight, I regret that I ever agreed to an IPO, although I admit that they were different times and there were probably monetary pressures which encouraged it,” Murdoch said April 25 at a U.K. media-ethics inquiry, called for by Prime Minister David Cameron. At the same event, Murdoch said he “failed” to prevent the phone-hacking scandal at News Corp.’s News of the World tabloid and blamed employees and lawyers for covering up the crime.

ITV Precedent

Ofcom, which started gathering evidence last week, said yesterday it will take the lawmaker committee’s report into account as part of its own probe. The regulator, which asked News Corp. last week to provide documents from civil cases, has said the New York-based company’s existing stake gives it “material influence” over BSkyB.

Even if News Corp. tried to avoid a sale, it may be compelled to sell down its stake in BSkyB to below 7.5 percent based on prior rulings by U.K. competition authorities, said Will Smith, an analyst at Jefferies International in London, who rates BSkyB shares “hold.”

In 2010, BSkyB was ordered to reduce its 17.9 percent holding in U.K. broadcaster ITV Plc (ITV) to less than 7.5 percent after antitrust authorities said such ownership could reduce competition in the television market.

Cover-Up

News Corp. Chief Operating Officer Chase Carey “has suggested that if there isn’t a path to control they’re more likely to sell assets than buy assets,” said Sarah Simon, an analyst at Berenberg Bank in London. “They’re very unlikely in the near to medium term to proceed with a new bid.”

News Corp. failed to disclose documents and made statements that “were not fully truthful,” the lawmaker panel said in London. Murdoch and his son James, who was chairman of the U.K. publishing business, must ultimately take responsibility, the lawmakers said. Three executives at the News International unit -- Les Hinton, Tom Crone and Colin Myler -- gave misleading testimony to the committee in 2009, the panel said.

The six Labour and Liberal Democrat lawmakers on the committee voted to condemn Rupert Murdoch’s leadership and the four members of Prime Minister David Cameron’s Conservative Party voted against it. One of them, Louise Mensch, said they “felt that was ultimately outside the scope of a select committee.”

Ofcom Independence

In a note to News Corp.’s employees, Murdoch yesterday said that “we certainly should have acted more quickly and aggressively to uncover wrongdoing” and that “we deeply regret what took place and have taken our share of responsibility for not rectifying the situation sooner.” News Corp. will continue to cooperate with all inquiries, he said.

Any buyer of News Corp.’s entire stake in BSkyB would also have to bid for the rest of the company, Sanford Bernstein’s Aspesi said. “It is never a great position to be in, a forced seller,” he said. They will “still look at this as a response to a potential regulatory action.”

BSkyB could buy the stake itself if News Corp. had to sell, Jefferies’ Smith said.

Ofcom, which has held discussions with the police, has said it will continue to assess all the evidence, including the ongoing police inquiries as well as the lawmaker conclusions.

“Ofcom is supposed to be independent of government. This is very clearly a government report,” Berenberg’s Simon said. It’s designed to grab the headlines. Ofcom has to do its own work.’’

To contact the reporter on this story: Jonathan Browning in London at jbrowning9@bloomberg.net

To contact the editor responsible for this story: Kenneth Wong at kwong11@bloomberg.net


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