In the months after a phone-hacking scandal erupted in Britain last summer, Rupert Murdoch told people within News Corp that he wanted to revisit his media company’s discontinued US$12 billion bid for pay television service BskyB.
News Corp chairman Murdoch still viewed the acquisition of the 60 percent of BSkyB not already owned by the company as a strategically important investment. The TV company, which posted an operating profit of more than US$1.7 billion last year, would have provided a steady revenue stream for his company.
Pressure was put on News Corp, mostly by investment bankers specializing in the media sector, who suggested that the best way to win government approval for the deal would be to sell or spin off the embattled British newspaper unit, News International, to help ease lawmakers’ concerns about Murdoch’s company owning the country’s largest satellite TV operator.
Murdoch rejected those proposals, according to a person involved in the discussions, who was not authorized to comment publicly on the conversations.
Any shred of hope for a BSkyB takeover in the near future appeared to have been dashed last week after e-mails surfaced suggesting that a News Corp lobbyist and the British culture minister had conspired to get the deal approved.
“I don’t think anybody believes they’ll get another shot at controlling BSkyB any time this decade,” said a person familiar with the company, who would discuss its strategic plans only on the condition of anonymity.
The failed deal highlights a period of caution and relative stagnation at the US$50 billion media empire, known for its risk-taking and forward-thinking acquisitions. For months, News Corp’s buoyant share price and solid financial performance, driven by the strength of its US television assets, had allowed executives based in New York to paint the scandal as an unfortunate, but isolated series of events at the company’s British tabloids, a tiny part of the overall business.
However, the events in Britain and the resulting scrutiny have begun to take a toll on the broader empire, according to at least a dozen people familiar with the company, including several former News Corp executives.
On Tuesday, the Culture, Media and Sport Committee of Britain’s parliament released a report that further damaged the company’s reputation.
Inside the company, one of the biggest concerns is that News Corp now sits under a magnifying glass, making any potentially suspect business dealings, even from years ago, vulnerable to scrutiny by the US government.
A former News Corp subsidiary, a Moscow-based billboard company called News Outdoor Russia, is the subject of an FBI inquiry into whether the company bribed local officials to advance its business. The findings of that investigation could prove a violation of the Foreign Corrupt Practices Act, according to a person briefed on the inquiry. News Corp sold the company in July last year to a bank controlled by the Kremlin.
The potential for a billion dollars of fines related to a violation of the act could dwarf the economic downside of anything related to the lawsuits in Britain, said Behnam Dayanim, a regulatory lawyer based in Washington.
“It may be the single most feared corporate criminal statute out there today,” Dayanim said.
News Corp declined to comment. News Outdoor Russia has denied all suggestions that the company bribed officials to advance its business.
The hacking scandal has delivered a blow to News Corp’s push into the potentially lucrative education sector, a project prized by Murdoch. In November 2010, News Corp paid US$360 million for a 90 percent stake in Wireless Generation, an education technology company based in Brooklyn, New York, that specializes in interactive learning tools.
In August last year, Wireless Generation lost its US$27 million no-bid contract to develop educational software for New York schools. Thomas DiNapoli, the New York state comptroller, said the state had rejected the Wireless Generation contract “in light of the significant ongoing investigations and continuing revelations with respect to News Corporation.”
In Turkey, News Corp, which operates several Turkish television stations, is one of three bidders for the country’s second-largest media group, Sabah-ATV, which is valued at US$700 million to US$1 billion. A deal would add to its portfolio of international pay TV stations, which includes Sky Deutschland in Germany and Sky Italia in Italy.
However, the bid could face regulatory opposition in Turkey as a result of the scandal.
“They’re persona non grata right now as a bidder on assets,” said a person familiar with the company’s plans, who did not want to publicly criticize News Corp.
A News Corp spokeswoman said the events in Britain had not affected potential acquisitions elsewhere.
Throughout the scandal, the company has managed investor nervousness by praising its entertainment assets and strong revenue, but it has also undertaken an expensive stock buyback program worth US$5 billion, an anomaly for News Corp and Murdoch.
Michael Nathanson, an analyst at Nomura Securities, praised the stock repurchases and minimized the effect the hacking scandal was having on the company’s overall strategy.
“I can’t imagine how what’s happening in the UK is impacting the people making huge decisions in those businesses,” Nathanson said. “I firmly think this is a story for folks in the UK.”
Others say News Corp did not grow from a tiny newspaper company in Adelaide, Australia, to one of the world’s largest media companies by sitting dormant.
“Buying back the shares isn’t building anything,” said Todd Juenger, an analyst at Sanford C. Bernstein & Co. “It’s not making the company bigger. It’s just changing the capital structure. I’d rather see a company that is growing and building asset value, than uniformly returning cash to shareholders.”
Inside News Corp, the hacking scandal has consumed an increasing amount of attention. Murdoch, a hands-on manager, who likes nothing better than to talk about his newspaper coverage, has spent the past several weeks preparing for the Leveson Inquiry into media ethics in Britain, being overseen by Lord Justice Leveson.
Joel Klein, hired by Murdoch to lead News Corp’s education initiatives, and Gerson Zweifach, a Washington lawyer hired as the company’s in-house counsel, have led the preparation, according to people close to the company and familiar with Murdoch’s schedule.
At least temporarily, two of Murdoch’s adult children, James and Elisabeth, have both been put at a distance from important corporate decision-making in the aftermath of the scandal.
Elisabeth, known for her acumen in television programming (she is credited with persuading her father to broadcast American Idol), withdrew from joining News Corp’s board in August last year amid widening investigations into the company’s British operations and criticism about nepotism on the board.
James, once considered his father’s heir apparent, resigned as chairman of BSkyB this month and has since spent time in Los Angeles meeting with studio executives to discuss ideas for making content more readily available digitally. He has also spent time in India and China, far from News Corp’s power base in New York, according to several people familiar with the company, who were not authorized to discuss James’ whereabouts.
James works closely with Chase Carey, News Corp’s president and chief operating officer, “on driving our overall growth, with a keen focus on our global television business and expansion into digital platforms,” News Corp spokeswoman Julie Henderson said.
The scandal has also cost Rupert Murdoch several of his most-trusted executives. News International’s former chief, Rebekah Brooks, faces possible criminal charges for her role in the scandal. Les Hinton, who had worked with Murdoch for 52 years, stepped down as the top executive at Dow Jones.
In testimony last week, Murdoch criticized Hinton, formerly News International’s chief executive, for hiring Colin Myler as editor of the News of the World and not pressing him to find out “what the hell was going on” at the tabloid.
He also blamed Myler and another longtime adviser, a News International lawyer, Tom Crone, for a “cover-up” of phone hacking, calling Crone “a drinking pal” and “a clever lawyer.”
In response, Crone called Murdoch’s attack “a shameful lie.”