News Corp. braces for shareholders brawl

Murdochs, directors to face investor ire over scandals at Friday's meeting

News Corp. investors are hopping mad and Friday they’ll get a rare chance to slam Rupert Murdoch in person about their concerns — from U.K. phone hacking, to a servile board, to son James’ leadership cred, to the purchase of daughter Elisabeth’s production company.

But no matter how heated the gathering may get, change at News Corp. is almost mathematically impossible without Murdoch’s assent. He controls nearly 40% of the Class B voting stock and his close ally, Saudi Prince Alwaleed Bin Talal, holds 7%. Every single other shareholder would have to vote as a block against them.

But they can still send a message.

The annual shareholders’ meeting, usually in New York City, will be held this year at the Zanuck Theater on the 20th Century Fox lot in L.A. where, as several Wall Streeters noted, security can be tightly enforced.

There’s no parking on the studio lot. News Corp.’s intricate attendance manifesto includes diagrams and a list of restrictions. No one will be admitted who doesn’t arrive on a company shuttle bus that leaves from a parking facility around the corner on Century Park West.

Yet News Corp.’s critics face a conundrum: despite the drama and the angst, its stock has remained sturdy and its businesses are performing well.

Pressured by the phone hacking scandal at its now shuttered Blighty weekly, the News of the World, the company in July ditched plans to buy its

British pay TV platform BSkyB and used the money for a hefty $5 billion share repurchase, which is by far Wall Street’s favorite use of extra cash.

“That’s the interesting thing,” said one analyst. With the stock buyback, the scandal “even turns into a win” for shareholders. “There will be fireworks at the meeting, but if you look at the current operations, business is going pretty well. Cable networks are doing great, broadcast is up from a year ago, the film side is doing fine.”

In a tough economy, ad revenue at Fox’s domestic cable channels rose 23% for the fiscal fourth quarter ended in June, the most recent reported, led by pricing and ratings growth at FX. Film profits surged 53%. Broadcast television saw higher local and national advertising and increasing coin from retransmission consent deals.

The shares are trading at about $17, well above their 52-week low of $13.83. On Wednesday, they closed off 1.69% at $16.90 in a down market after hitting $17.35 earlier in the day.

“If the businesses weren’t doing well or the hacking scandal spreads to the U.S., then Rupert might have a problem,” said one investor.

He and others recalled the maelstrom at Disney in 2004 when irate shareholders stripped Michael Eisner of the chairmanship. He remained CEO. News Corp. shareholders have also asked the company to split the posts.

The Disney coup succeed because the businesses weren’t being run well, and Eisner wasn’t well liked personally. And Disney isn’t a family-controlled company.

Investor advisory groups in the U.S. and the U.K. want radical changes to the board, in some cases urging investors to vote down 13 of the 15 directors, including James, deputy CEO and chairman and head of international; Rupert’s oldest son Lachlan; and deputy chairman and chief operating officer Chase Carey.

Murdoch’s daughter Elisabeth was meant to take a board seat this summer after News Corp. acquired her company Shine for $675 million, but the move was tabled after the phone hacking scandal accelerated.

Amalgamated Bank, as a trustee for a handful of funds, has filed suit against News Corp. in Delaware Chancery Court, accusing the Murdoch family of self dealing in the Shine acquisition and later amending the complaint to include the phone hacking scandal, which it claims is the direct result of a negligent board.

The judge in the case is now considering News Corp.’s motion to dismiss.

Some find the outcry disingenuous. “Saying Murdoch makes some stupid acquisitions is like saying it’s raining water,” said one fund manager. Being “shocked, shocked” about a cozy board or nepotism is pointless, he added, since Murdoch’s always been public about wanting dynastic succession at News Corp.

“Who’s surprised? You can’t complain about these things. You know they’re going on.”

James’ position as heir apparent, however, remains shaky as he faces another round of questioning in front of a U.K. Parliamentary committee next month.

As the head of News Intl. he authorized a large out-of-court settlement for phone hacking victim Gordon Taylor, a former pro-soccer player and head of the Professional Footballers’ Assn. He claims to have no knowledge of widespread abuse at the time but several former employees contradict him, saying that he was aware of a larger problem.

Pressure grew on Wednesday as Julian Pike, a former lawyer for News Intl., testified that he had seen evidence of extensive hacking and informed company management.

James has closed News of the World newspaper where the offenses took place and declined a $6 million bonus the board awarded him for fiscal 2011. But many on Wall Street and in the industry think it possible he may be arrested, as have a handful of the division’s former employees, or fall on his sword and resign.

“James would prefer us to think that he was in a minor way incompetent rather than thoroughly dishonest,” said Mark Lewis, a lawyer for U.K. hacking victims.There have been 63 hacking suits filed in the U.K. so far. Lewis, who represents ten of the cases, said only 400 of some 6,500 victims have been contacted.News Corp. has set aside about $32 million to deal with the steady stream of lawsuits stemming from the phone-hacking scandal. But the eventual financial impact is impossible to calculate.

“I basically have no idea how big it is going to be,” said Alan Gould, an analyst with Evercore Partners. Over the summer, when the scandal erupted, he put a $1 billion figure on damages but admits that was probably an over-estimate. But it’s still one a conglom the size of News Corp. can digest.

“It was a U.K. paper doing the hacking and the U.K. paper was closed,” said another analyst. “Just purely hypothetically, if they found something at the Wall Street Journal, at Fox, or at the Fox television stations, that would be a negative.”Lewis says he knows of two Americans who were hacked, both in the U.K. He’s asked New York lawyers, Norman Siegel, former director of the New York Civil Liberties Union, and Steven Hyman of McLaughlin & Stern, to explore U.S. angles.

“We’re doing research, looking for evidence of hacking here. Or trying to determine if people at News Corp. in New York knew or should have known what was happening there,” Siegel said. Depending on what emerges, he said he could ask a Federal Court for authorization to take depositions in New York that might help the U.K. litigation.

“We think that there are real issues to be pursued, and we intend to pursue them,” said Hyman.