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James Murdoch's BSkyB Exit Could Presage a Renewed News Corp. Bid

Wednesday, 04 April 2012 09:42 AM

James Murdoch’s resignation as chairman of British Sky Broadcasting Group Plc isn’t simply part of Rupert Murdoch’s strategy to put the hacking scandal behind him. It also may give him another shot at acquiring the 60 percent of BSkyB he doesn’t already control.

The resignation, announced yesterday, brings an end to several months of speculation about the future of Rupert Murdoch’s 39-year-old son, who probably will be criticized in a parliamentary report into phone hacking at News International expected to be issued this month.

It also could serve as a bargaining chip in News Corp.’s complicated dance with U.K. press regulators. Any pursuit of the pay-TV company will probably be at least a year away.

“News Corp. would like to revive its bid for BSkyB in due course,” said Claire Enders of Enders Analysis, a London-based media consultancy. “It is in the interest of News Corp to have it appear and come across as a transaction as opposed to a Murdoch issue.”

A government committee is studying the question of whether any limits should be placed on media ownership in the U.K., while a British regulatory panel, Ofcom, is considering the question of whether News Corp. and James Murdoch should be considered “fit and proper” to own and manage the pay TV company.

Prominent Role

James volunteered to step back from his prominent role at BSkyB and wasn’t pushed, according to people familiar with the matter. The decision clarified support for James among the company’s top managers, these people said.

BSkyB shares fell as much as 10 pence, or 1.5 percent, to 665.50p today. The stock has dropped 19 percent over the past 12 months, cutting its market value to 11.4 billion pounds. News Corp. offered 700p per share for BSkyB before the government derailed the purchase.

James’s reduced role at BSkyB will allow him to focus on the parliamentary report and a probable appearance before a judge-led inquiry into media ethics in the U.K., two people who worked with him closely said. Rupert Murdoch is also expected to give evidence to the inquiry.

Julie Henderson, a spokeswoman for New York-based News Corp., declined to comment on any speculation about the company’s interest in BSkyB.

When the phone hacking scandal derailed the BSkyB deal last July, what was to have been the crowning achievement in Rupert Murdoch’s media empire slipped through his grasp. But sources close to the company say he has never given up on the dream of owning BSkyB, which he sees as a potent money machine.

BSkyB earnings contributed $498 million, or more than 18 percent, of News Corp net income of $2.7 billion in the year ended June 2011. The company, with more than 10 million clients, has focused on selling additional products including broadband and telephone offers, to generate more revenue from its existing subscribers.

Exclusive Rights

BSkyB has held exclusive rights to Britain’s top soccer games since 1992. The broadcaster’s subscription-based business makes it easier to generate secure and rising sales compared with content reliant on a volatile advertising market.

Owning BSkyB outright would generate as much as $800 million in free cash flow annually to News Corp.’s coffers, says David Joyce of Miller Tabak & Co. in New York, providing cash for further acquisitions.

Strategically, BSkyB would give Murdoch a complete distribution system that would fit nicely with his television assets.

“The idea of having both content and distribution could be powerful,” said Joyce, who rates News Corp. a “buy.” “It would help Murdoch roll out new content on those networks and get advertising for any new channels.”

Television business accounted for more than 60 percent of News Corp.’s operating income last year, up from 46 percent in 2007.

The reality, though, is that any News Corp. tie-up with BSkyB is at least a year or two away. No one envisages any deal moving forward until the phone hacking scandal is resolved, and that won’t happen until well into 2013 at the earliest.

Total Control

Two executives who work closely with James insisted that his decision to relinquish the executive chairman title at BSkyB didn’t presage any immediate renewal of News Corp.’s bid for total control of the lucrative pay-TV company.

One of these observers said that the long-range plan at News Corp., after regulatory inquiries and police investigations had taken their course, would be to build up the company’s TV assets, which are more profitable than the company’s newspaper properties. A renewed focus on BSkyB would fit into that strategy.

Pursuing that strategy would probably entail News Corp.’s selling its British newspapers, according to two former executives. Murdoch’s ownership of the U.K.’s highest circulation paper, The Sun, along with The Times and The Sunday Times, is likely to remain an obstacle to outright ownership of BSkyB, which offers Sky News. Sources say that Murdoch may be willing to part with those papers.

Chase Carey

Two former executives pointed to Rupert Murdoch’s designation last August of chief operating officer Chase Carey as his heir apparent as evidence that the sale of the company’s U.K. newspapers, formerly an unthinkable prospect, might be possible at some point. Carey has said News Corp. remains committed to newspapers, and that dailies are part of the company’s DNA. Carey has also said that unlike his boss, who inherited his first newspaper from his father, he has no sentimental attachment to print.

While Murdoch once again demonstrated his commitment to newspapers by opening The Sun on Sunday in February, seven months after closing the scandal-ridden News of the World, the opening of a Sunday tabloid also makes it easier for him to sell his British newspapers as a complete package, observers in London said.

Meantime, the younger Murdoch’s decision to give up his position as executive chairman of BSkyB, while retaining a seat on the board, hasn’t mollified opponents of the company’s dominant position in U.K. media.

‘Not Distract Us’

Harriet Harman of the opposition Labour Party said that “changes at the top of BSkyB should not distract us from the fundamental, structural problems of media ownership. Murdoch owns too many newspapers. Never again must we allow any individual or organization to acquire such a concentration of power when it comes to media ownership.”

That’s not necessarily an insurmountable problem for Murdoch, say News Corp. watchers. “In due course, they would seek to separate out the newspapers into a kind of a trust -- separate ownership or separate structure so that it wouldn’t be so visible to regulators,” Enders said. “This is the biggest media company in the world, and it thinks of everything.”

BSkyB Board

For the immediate future, though, Rupert Murdoch still has a James Murdoch problem. According to company insiders, James kept his seat on the BSkyB board because he has contributed to the company’s success over the past eight years and because the criticism against his handling of the phone hacking issue at News International has nothing to do with the satellite broadcasting company. That may not be enough for News Corp.’s growing ranks of adversaries.

“A lot of the criticism of News Corp in Britain has centered around James Murdoch himself, and in some ways it will make sense to have him step down,” said Tim Bale, a professor of political science at the University of Sussex. “That removes the most obvious cause of criticism. The fact that he’s still on the board, I think, will cause a few raised eyebrows because it looks like it’s a cosmetic move.”

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

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Wednesday, 04 April 2012 09:42 AM
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