Turmoil forces Murdoch into retreat

News Corp. might change radically, post-scandal

Rupert Murdoch’s scandal-chastened retreat on his bid for BSkyB may well spur the ascent of Chase Carey’s influence and other changes within News Corp. as the company grapples with what’s sure to be a drawn-out series of investigations into its newsgathering operations on both sides of the Pond.

The steady stream of allegations of phone hacking, payoffs to public officials and other unsavory activities ascribed to staffers at some of News Corp.’s U.K. papers forced Murdoch to bow to the inevitable early Wednesday and announce that the company was dropdropping its bid to take over full control of Britain’s sat-TV giant.

The decision marked an extraordinary reversal of fortune for a $12 billion deal, championed by Murdoch’s heir apparent, deputy chief operating officer James Murdoch, that seemed on the verge of approval barely two weeks ago. Now, the expanding firestorm has stirred up a torrent of criticism of the company’s management — so much so that Murdoch’s long-standing plan to ultimately hand the reins to one of his children could be in jeopardy.

News Corp. insiders are bracing for more changes in the coming days as the company responds to the calls for accountability at the highest levels.

Even before the U.K. scandal exploded earlier this month, Wall Streeters and others had been pushing News Corp. on governance and corporate accountability issues given Murdoch’s long history of running the company as he sees fit, even in the face of internal opposition. Murdoch watchers said it was notable that the announcement on the withdrawal of the BSkyB bid came from Carey, News Corp.’s deputy chairman, prexy and chief operating officer. There’s increasing speculation that Carey could emerge from the U.K. dust-up with even more authority, if not the CEO title.

“We believed that the proposed acquisition of BSkyB by News Corp. would benefit both companies, but it has become clear that it is too difficult to progress in this climate,” Carey said. “News Corp. remains a committed long-term shareholder in BSkyB. We are proud of the success it has achieved and our contribution to it.”

In addition to the political fallout in the U.K., News Corp. has been humbled in the financial markets, with its stock price sinking 15% over a five-day period. Shares rebounded slightly Wednesday, gaining 58¢ to close at $15.93, on the heels of the news of the BSkyB bid withdrawal, a sign that the company recognized the magnitude of the public opposition to the deal in the U.K.

On the 20th Century Fox lot, sources said many staffers have been keeping close tabs on media coverage of the unfolding scandal. The situation still seems far removed from News Corp.’s Hollywood businesses, yet insiders can’t help but be concerned about the fallout for the company overall and the damage to News Corp.’s stock. Over time, the growing call by U.S. pols for investigations into the company’s journalistic practices could become a thorn in the side of Fox News, the New York Post and other domestic news operations.

Wall Streeters were quick to note the irony that Murdoch’s ambition to buy out the shares in BSkyB that News Corp. doesn’t already own and dominate the U.K. pay TV market — a strategic play for his company — had been hobbled by his devotion to old-school newspaper assets that contribute far less profit to his empire. In classic Murdoch fashion, News Corp. could mount another run at BSkyB down the road, but it’s unlikely to be able to pull off a deal any time soon.

“Perhaps this rebuke will force News Corp. to reconsider its ownership of U.K. newspapers,” Nomura Securities analyst Michael Nathanson wrote in a research note issued Wednesday. “We hope this is a turning point for the company’s strategy and asset allocation as the ownership of highly inconsequential newspaper assets has forced the dropping of a strategically important asset.”

Indeed, there’s growing expectation that News Corp. will move to divest itself of the News Intl. unit that houses its U.K. newspapers, the Sun, the Times, the Sunday Times and the now-shuttered News of the World, the initial source of the phone-hacking charges that first erupted in 2006. Public and political outrage over the situation exploded earlier this month when rival papers reported allegations that snoops working for News of the World tampered with the voice mail of a missing 13-year-old girl who was later found dead.

The tabling of the BSkyB bid, first unveiled in June 2010, was welcomed by members of Blighty’s government as all three political parties had joined forces and were set to urge News Corp. to abandon the proposal in a nonbinding House of Commons vote on Wednesday. Rupert and James Murdoch have been summoned to appear before a House of Commons panel next week, along with embattled News Intl. prexy Rebekah Brooks.

“The business should focus on clearing up the mess and getting its own house in order,” a rep for Prime Minister David Cameron said, while Deputy Prime Minister Nick Clegg said the withdrawal was the “decent and sensible” thing to do.

Labour Party leader Ed Milliband said the decision was “a victory for people up and down this country who have been appalled by the revelations of the phone-hacking scandal and the failure of News Intl. to take responsibility.”

BSkyB’s shares fell 3.6% immediately after the news to 669 pence ($10.73) per share, well below the 700 pence ($11.23) level when News Corp. originally bid for the satcaster, though they stabilized later in the day.

Criminal investigations into the alleged illegal activity of the News of the World, the Sun and the Sunday Times are under way and could take years to conclude as proceedings are expected to look into the details of attempts to hack into the phones of nearly 4,000 individuals. Media regulator Ofcom said it would continue its investigation of BSkyB’s ownership.

Cameron on Wednesday announced plans for two separate government inquiries into phone hacking and media standards.

“The people involved, whether they were directly responsible for the wrongdoing, sanctioned it or covered it up, however high or low they go, must not only be brought to justice, they must also have no future role in the running of a media company in our country,” Cameron said.

New revelations of the scandals have grown seemingly by the hour since the News of the World was shuttered on Sunday. On Wednesday, the paper’s legal manager Tom Crone, who had greenlit many of the stories, was the latest in a raft of execs to ankle News Intl.

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