Analyst Puts Odds of Rupert Murdoch Departure at 25%, Upgrades News Corp. Stock

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Even under the much likelier scenario that the Murdoch family retains control of the conglomerate, Cowen's Doug Creutz sees upside for the stock.

NEW YORK - There is a 70 percent probability that the Murdoch family will remain in charge of News Corp., but a 25 percent chance that chairman and CEO Rupert Murdoch and son and deputy COO James will eventually step aside amid the phone hacking scandal.

Those are the latest odds in the ongoing debate over the company's future direction, according to Cowen analyst Doug Creutz who upgraded his rating on News Corp. shares from "neutral" to "outperform" on Wednesday.

"We are upgrading News Corp. today to reflect what is in our view an increasing possibility that the Murdoch clan may have to hand over operational control of the company due to continued pressure arising from the News of the World cell phone hacking scandal," he wrote in a report.  "While we still view continued Murdoch control of the company as the most likely outcome, we believe the overall risk/reward has become attractive enough."

Creutz also explained: "Our primary historical objection to owning News Corp. shares has been driven by concerns that capital allocation has been driven by dynastic empire building instead of shareholder value creation." He pointed to the acquisition of newspaper assets in the deal for Dow Jones a few years ago as one example.

Creutz's estimate of a 70 percent probability that the scandal will not result in a change of control also includes the expectation that it will "not result in any major financial damage." In that scenario, he expects a "gradual return" of the company's stock market value and 10 percent stock outperformance relative to the broader stock market over the next year.

His 25 percent probability case of a complete Murdoch family exit envisions a faster improvement in stock market value "due to (a) the likely end of problems related to the scandal, and (b) a perceived improvement in capital allocation and corporate governance." In that case, he expects at least 25 percent outperformance by News Corp.'s stock relative to the market.

If negative public opinion and political and legal pressures continue to rise, the scandal could threaten or start to threaten the conglomerate’s U.S., Creutz said in describing this scenario. "With the last lines of the company’s defenses breached, Rupert and James Murdoch voluntarily decide to, or are asked by the board to, step aside to preserve the company’s financial well-being," he wrote.

President, COO and deputy chairman Chase Carey could become CEO, while the board could pick a non-Murdoch as chairman, "and Murdoch family representation on the board is likely to be diminished," the analyst added.

A complete nightmare scenario remains unlikely though, Creutz said. It would involve "a spread of the scandal's toxicity to the U.S., combined with a decision by Murdoch to hang on to the bitter end, and a significant dereliction of duty by the board of directors," he wrote. "We think this outcome remains unlikely with just a 5 percent subjective probability."

Even his likeliest scenario could include some positive changes though, Creutz said. Among the possibilities: Carey becomes CEO, the company divests its BSkyB stake or it sells it U.K. newspaper group News International. "We think this would be viewed as a positive for shareholders, as we believe most everyone - with the exception of Rupert Murdoch - would rather see News have less exposure to the secularly declining newspaper business," Creutz said.

News Corp.'s Class A stock finished the day up 0.9 percent at $15.93.


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