Perfect storm engulfs News Corp.'s U.K.-based activities

News Corp. takes a Shine to bigger plans

A perfect storm is engulfing News Corp.’s U.K.-based activities, and the weather is predicted to get even rougher before skies start to clear.

Rupert Murdoch has bid $12.4 billion to buy the 61% of British paybox BSkyB that he does not own — which would mark the biggest single acquisition in the conglom’s history. But the bid comes amid anxiety that a wholly-owned BSkyB would give Murdoch too much power in the U.K. media market.

Compounding the problem is that the debate coincides with a juicy scandal involving allegations that journalists at the Sunday tabloid News of the World hacked into cell phone voicemails of celebrities, members of the royal household and political figures.

Admittedly, the claims entail only a small portion of the entire News Corp. empire. But the taint is coming at a crucial time, and gives an opportunity for government regulators, media watchdogs, celeb handlers and concerned individuals to connect the two events and to make Murdoch’s BSkyB bid a political hot potato.

There are also intersecting circles between the Murdoch clan and that of new British Prime Minister David Cameron, whose spin doctor, Andy Coulson, a former editor at the Murdoch-owned News of the World, resigned last month as further evidence of phone hacking emerged.

The outcome of the deal is of huge significance for News Corp., as it represents a further shift in the company’s center of gravity from print to pay TV platforms and content — the conglom’s real growth engine.

BSkyB profits rose 59% to £407 million ($648 million) on revenue up 15% to $5.08 billion in the six months ending Dec. 31.

There are other reasons why the success of the deal is important to News Corp.’s bottom line: Murdoch hopes to save money when he negotiates rights with Hollywood studios because it will be easier to sign multiterritory deals across payboxes BSkyB, Sky Deutschland (owned 45% by News Corp.) and Sky Italia (fully owned) once BSkyB is entirely in his hands.

“There is likely to be a more centralized buying team,” says one analyst. “The Hollywood studios are nervous because Sky already has huge market power.”

And of course, a fully owned BSkyB would make it easier for News Corp. in the U.K. to bundle together subscription packages across TV, print and online.

Moreover, owning BSkyB outright makes Rupe less dependent on the vagaries of the advertising market.

The gravity of the position is such that Murdoch recently cancelled a visit to the Davos World Economic Forum in Switzerland to remain in London and take charge of the recent deteriorating situation and oversee talks aimed at securing the BSkyB purchase.

“This (scandal) is probably the worst thing that’s ever happened to News Corp.,” says veteran U.K. media commentator Raymond Snoddy. “There is no doubt that Murdoch is very, very angry about what has been allowed to occur in the U.K.”

At the heart of the crisis is a long-running allegation that journalists at News of the World broke the law by systematically intercepting cell phone voice messages of scores of celebrities, members of the British royal household and senior politicians including former prime minister Gordon Brown.

“The phone hacking scandal has intensified the debate over whether Murdoch is a fit person to expand his U.K. interests,” Snoddy says.

Some of those whose phone messages were hacked have been paid off by News Corp., while literally dozens of civil cases involving other allegations are waiting to be heard in courts.

To make matters worse, there have been suspicions of a police coverup although the Metropolitan Police have now reopened their investigation.

For 18 months after the News of the World’s royal editor Clive Goodman was jailed in January 2007 for intercepting phone messages, the paper’s defense — that the hacking was the work of one rogue reporter — seemed to hold water.

But since July 2009, following probes by the Guardian and the New York Times (both dedicated Murdoch baiters), that defense has steadily been ripped apart.

Matters began to spiral out of control for News Corp. on Jan. 5 when it emerged that News of the World executive Ian Edmondson had been suspended before Christmas. He had been identified in a court document commissioning a private detective to intercept the voice messages of actress Sienna Miller.

Edmondson was a close colleague of Coulson when both men worked at the News of the World.

While Coulson continues to deny any knowledge of phone hacking during his editorship, the disciplinary action against Edmondson increased the pressure on him to quit as Cameron’s spin doctor. He announced his resignation as director of communications Jan. 21, claiming that he could no longer do his job because he had become the story.

Coulson was a pivotal figure in ensuring that Cameron’s Conservative Party was endorsed in last May’s election by News Corp.’s U.K. papers, led by the mass-circulation Sun and News of the World and the upmarket Times and Sunday Times.

It is the closeness of Murdoch and his son James (who runs News Corp.’s European and Asian operations and chairs BSkyB) with to the heart of the political establishment, combined with the phone hacking allegations, that has made the issue of Murdoch’s BSkyB bid extraordinarily toxic and put media minister Jeremy Hunt, who must ultimately rule on the deal, in an invidious position.

“Murdoch (likely) hoped that the BSkyB bid would have been nodded through by now because of his route into Downing Street,” observes the ex-head of BBC Global News Richard Sambrook.

“It’s the first time I can remember News Corp. being on the back foot in the U.K.,” he adds. “Murdoch is embarrassed that the phone hacking row wasn’t closed down by his executives in London months, if not years, ago.”

Observers predict that it is only a matter of time before there will be blood on the carpet at Murdoch’s Wapping HQ in London’s East End.

“There is no doubt that heads, and quite senior ones, will roll,” reckons Snoddy. “I don’t believe for a moment that Murdoch knew what was going on.”

While Hunt announced Jan. 25 that he intended to refer the BSkyB bid to the U.K.’s Competiton Commission, delaying the takeover for up to eight months, he added that this could be avoided if News Corp. came up with “remedies” to assure him that ownership of the paybox would have not have an adverse impact on media diversity.

One remedy would be to create an arm’s length relationship between News Corp. and its highly regarded Sky News channel, which could perhaps be run by an independent trust.

It’s thought that BSkyB has, at best, a week or so to address these concerns before Hunt has no choice but to call in the Competition Commission.

“You have to ask yourself if Murdoch is so desperate to do the deal that he will give up complete control of Sky News,” observes Stewart Purvis, professor of television journalism at London’s City U. “In ordinary circumstances you’d think that Murdoch would put the deal first, but as his purchase of Dow Jones showed, Murdoch operates by his own values rather than the dictates of conventional business.”

The betting, however, is that regardless of what solutions Murdoch comes up with, the political heat surrounding the bid is such that Hunt will end up ordering a competition investigation.

“On balance, I think Hunt will take the cautious route and make a referral,” Snoddy says. “It could be politically damaging for both him and the government if this wasn’t properly examined by an independent regulator.”

There is also a widespread belief among industryites that any findings by the Competiton Commission are unlikely to stop the deal in its tracks.

According to media regulator Ofcom, were News Corp. to own BSkyB outright, its reach of regular news consumers in the U.K. would increase from 31% to 51% — a big chunk, but not necessarily a threat to media diversity because the BBC is so powerful.

Snoddy does not believe the deal will be stopped on competition grounds. “The likelihood is that the takeover will be given the go-ahead by regulators albeit with small provisos, which will give Hunt permission to allow it to happen,” he predicts.

However, by the time Hunt is ready to greenlight the bid, the stock price of BSkyB, which on Jan. 27 reported a 26% increase in half-year profits, is likely to have risen further.

In other words, Murdoch will have to pay more for the 61% of the asset he wants to acquire.

When the original bid was made in June, the stock was trading at barely $9.68; Murdoch offered $12.40, but the price has since risen to above $12.30.

“It is very difficult to know if News Corp. will still want to have total ownership of BSkyB if the share price starts to soar,” says Snoddy. “On balance, I think he will. Murdoch has a history of overpaying, as his takeover of the Wall Street Journal showed. If he wants something badly enough, he just finds the money.”

Should the litigants of the alleged phone hacking win their cases, Murdoch could end up paying a very high price indeed — and one that raises a big question mark about the integrity of the methods employed by an important part of his British operation.

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