via:Bloomberg.com

BSkyB Deal Risk Grows on Younger Murdoch’s News Corp. Links

July 11, 2011, 11:10 AM EDT

By Amy Thomson and Robert Hutton

(Updates with News Corp. shares in 13th paragraph.)

July 11 (Bloomberg) -- James Murdoch’s ties throughout the News Corp. empire may threaten the company’s 7.8 billion-pound ($12.4 billion) bid for British Sky Broadcasting Group Plc as a phone-hacking scandal around a News Corp. tabloid escalates.

The 38-year-old son and heir-apparent to News Corp. Chief Executive Officer Rupert Murdoch has since 2007 been overseeing News International, the U.K. publishing unit including News of the World, the Sunday tabloid that was shut down on July 9 amid allegations that employees hacked into voicemails of murder and terror victims and bribed police. In the same year, Murdoch became non-executive chairman at BSkyB after running the satellite television company for four years as CEO.

“It’s politically difficult for the final approval for the financial transaction to occur against a background of which the chairman of News International is connected with BSkyB and his name is Murdoch,” said Claire Enders, founder and CEO of media researcher Enders Analysis in London, whose clients include the U.K. government and the Ofcom broadcast regulator. “It’s really a question of the political climate.”

BSkyB slumped as much as 7.6 percent to 693 pence in London, below the 700-pence-a-share bid News Corp. made last year. While the alleged phone-hacking incidents predate the younger Murdoch’s role at News International, he said last week when announcing the closure of the tabloid that he shouldn’t have approved out-of-court settlements to hacking victims.

Letter to Ofcom

The Ofcom regulator, which says it’s monitoring a probe as the number of police arrests rises, has the power to bar News Corp. from owning a broadcaster if it finds senior executives not “fit and proper” to hold a license.

Alice Macandrew, a spokeswoman for News Corp., declined to comment when asked whether James Murdoch’s position would affect the company’s bid for BSkyB. Murdoch wasn’t immediately available for an interview on the matter.

U.K. Culture Secretary Jeremy Hunt wrote today to Ofcom CEO Ed Richards, asking whether he’d reconsider any of his previous advice including “confidence in the credibility, sustainability or practicalities” of News Corp.’s undertakings for the BSkyB bid. Hunt also asked Ofcom whether its assessment of whether News Corp. is fit and proper to run a broadcaster may change.

The U.K. government is looking for a way to block the deal because of the public outrage after the hacking allegations, a person familiar with the matter said. As the regulatory process has already been laid out, the only organization that can raise issues with the takeover by News Corp. at this stage is Ofcom, said the person.

‘Declared War’

Hunt assumed review of the BSkyB purchase after Business Secretary Vince Cable was quoted as saying he had “declared war” against Rupert Murdoch.

News Corp. hasn’t made any decision on whether to withdraw its bid and will continue to wait for regulatory clearance on the transaction which may come after the summer recess, said another person familiar with the matter. The House of Commons is breaking from July 20 to Sept. 5.

As Rupert Murdoch arrived at News International’s headquarters in London’s Wapping yesterday to contain the crisis, U.K. politicians intensified calls for a halt of the BSkyB deal, the biggest in News Corp.’s history.

Shares Slump

“The first thing he should do is to drop the bid,” Labour Party leader Ed Miliband told BBC Television. Energy Secretary Chris Huhne said Murdoch should give “his personal assurance” that phone-hacking wasn’t done at other company publications. News International also publishes The Sun, The Times and The Sunday Times.

BSkyB fell as much as 57 pence to 693 pence and traded 6.5 percent lower at 701.5 pence at 3:38 p.m. in London. New York- based News Corp. retreated 5.7 percent to $15.80 in Nasdaq Stock Market trading.

BSkyB shares dropped 12 percent last week as the four-year- old phone-hacking scandal at Britain’s largest Sunday newspaper escalated, prompting Prime Minister David Cameron to pledge an independent inquiry. Including today’s decline, the slump wiped about 2.6 billion pounds off the company’s market value.

Bloomberg LP, the parent of Bloomberg News, competes with News Corp. units in providing financial news and information.

News Corp., which already owns 39 percent of BSkyB, wants full control to gain access to the broadcaster’s increasing cash flow. BSkyB may also help Murdoch make News Corp.’s newspapers more profitable by allowing him to bundle print and pay-TV subscriptions and spread content over media platforms.

Earnings Outlook

Analysts project a 28 percent increase in BSkyB’s adjusted per-share earnings in the year ended last month, as more viewers subscribe to its pay-TV channels. That compares with estimate for a 4 percent gain at News Corp. BSkyB has more than 10 million U.K. customers for services that include sports, on- demand TV and high-end international content from networks such as Time Warner’s HBO.

BSkyB was where the younger Murdoch shined as a manager. He was 30 when he was named CEO in 2003, making him the youngest chief of a FTSE-100 company. He more than doubled the company’s profit in four years and increased sales by 42 percent as he drove the broadcaster beyond traditional pay-TV business.

By the time he left in 2007 to lead News Corp.’s Asia and European operations, it was seen as a step toward eventually succeeding his father, said Alexander Wisch, an equity analyst at Standard & Poor’s in London who rates BSkyB as “hold.”

“When James arrived at BSkyB, he was greeted with quasi- universal skepticism,” said Claudio Aspesi, a London-based analyst at Sanford C. Bernstein. “In a few years he managed to change a lot of people’s opinion both of him and of the potential of BSkyB.”

Misled Parliament

In a note to employees to announce the closure of the News of the World, the younger Murdoch said the company had misled the British Parliament. During hearings in 2007 and 2009, executives including Les Hinton, former News International chairman, and Colin Myler, News of the World editor, said that there was no evidence that more than one reporter had been involved in phone hacking.

“I now know that I did not have a complete picture when I did so,” Murdoch said June 7, referring to his approval of out- of-court settlements to hacking victims, made in return for non- disclosure agreements. “That was wrong and is a matter of serious regret.”

Police Arrests

When asked at a press conference the next day whether James Murdoch remained a “fit and proper” person to run a large company, Cameron said: “I read the statement yesterday. I think it raises lots of questions that need to be answered and these processes that are under way are going to have to answer those questions.”

London police have made eight arrests as part of the phone- hacking investigation, including that of Andy Coulson, one-time editor of the News of the World and former communications chief for Cameron. Coulson has denied any knowledge of reporters tapping phones when he led the paper.

James and Rupert Murdoch have both given their backing to News International CEO Rebekah Brooks, who was editor of the tabloid when the alleged phone-hacking took place. She now reports to the younger Murdoch.

Hinton, now CEO of News Corp.’s Dow Jones division, may take the blame within News Corp. senior management for failure to effectively handle the phone-hacking scandal, the Financial Times reported, citing unidentified people close the company.

Brooks Questioned

Brooks is set to be questioned under caution in London in the next two weeks, the Daily Mail reported. She will be asked to give a full account of her actions during the period from 2000 to 2003 when she was editor, the newspaper said.

“If you assume for a second that somebody may have -- and this is a huge hypothetical -- that the senior management at News Corp knew sooner than we think about all of this, I don’t think anybody’s resignation will stop the authorities from asking questions,” Aspesi said.

In its final edition’s editorial yesterday, the News of the World said it demanded “high standards” and apologized that “for a period of a few years up to 2006 some who worked for us, or in our name, fell shamefully short of those standards.”

“Phones were hacked, and for that this newspaper is truly sorry,” it said.

Rupert Murdoch started off in 1953 when he inherited a daily newspaper with a circulation of 75,000 in Adelaide, Australia. He then set out to build an empire with newspapers, satellite-television and movie studios spanning the globe.

‘Seismic Proportions’

He traded his Australian passport for U.S. citizenship in 1985, a move that exempted him from restrictions on foreign ownership of U.S. TV stations and paved the way for the purchase of Fox Entertainment Group Inc., which includes the 20th Century Fox film studio.

The News of the World was Murdoch’s gateway into the British press when he bought it in 1969. He built it into the biggest-selling Sunday newspaper in the country, and philandering politicians and celebrities learned to fear the knock on the door from one of its reporters. Closing the tabloid has done little to quell the public outcry at the phone-hacking allegations.

“This is a scandal of seismic proportions and of immense political and financial impact on News Corp. -- potentially extremely negative to the business as a whole,” Enders said.

--With assistance from Jonathan Browning and Brett Foley in London, Brett Pulley in New York, and Ben Livesey in San Francisco. Editors: Kenneth Wong, Heather Harris
To contact the reporters on this story: Amy Thomson in London at athomson6@bloomberg.net; Robert Hutton in London at rhutton1@bloomberg.net.
To contact the editors responsible for this story: Kenneth Wong at kwong11@bloomberg.net; James Hertling at jhertling@bloomberg.net.