Phone Hacking Report: Experts Discuss Implications for News Corp., Murdochs

Rupert Murdoch, James Murdoch - Cheltenham Horse Racing Festival - 2010
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Analysts weigh in on the possible impact on News Corp.'s BSkyB stake, its U.K. newspaper holdings and more.

LONDON - What will Tuesday's report from a U.K. parliamentary committee on phone hacking at News Corp. mean for the conglomerate, chairman and CEO Rupert Murdoch and his son and deputy COO James Murdoch? And will it affect the company's stake in U.K. pay TV operator BSkyB and its U.K. newspaper holdings?

Wall Street and industry observers started debating the potential fallout on Tuesday, but the full impact was not immediately clear.

The committee concluded that some middle management at News International had misled parliament on the topic of phone hacking and that Rupert Murdoch was "not fit" to run a major international company. 

Analysts still said that the most immediate impact, if any, was most likely to come in News Corp.'s U.K. business.

Evercore Partners analyst Alan Gould said it is possible that U.K. regulator Ofcom could end up deciding that News Corp.  must lower its stake in pay TV operator BSkyB if it decides the mogul and his conglomerate are unfit to own broadcast assets in the U.K. in the same way that the parliamentary report called Murdoch "not fit" to run a major international company.

"If News Corp. has to sell down, it may have to go down to say 20 percent, but not necessarily sell out completely," he said. "Long-term I think it would be a negative if they are forced to sell here" given the lower current BSkyB stock price. "Short-term, it may be a positive if News Corp. takes the proceeds and adds them to its buy back program," he added though.

Others saw little immediate fallout for News Corp.

"It does not appear the committee has power to act on [its] conclusion and it is not even clear that Ofcom could act on Murdoch and/or News Corp. being “unfit” in the U.K. beyond BSkyB’s cable network broadcasting licenses," BTIG analyst Richard Greenfield said in a report. "Furthermore, with no clear evidence that News Corp.’s problems extend beyond the U.K., we find it difficult to foresee meaningful problems for News Corp.’s non-U.K. assets, which represent the vast majority of News Corp.’s market capitalization."

Concluded Greenfield: "Despite the potential benefits to News Corp. shareholders from escalating phone-hacking fallout in the U.K., we are still far from convinced any of these worst case scenarios will actually play out."

Before Tuesday's parliamentary committee report though, Peter Toren, legal expert at Weisbrod Matteis & Copley, said there could well be some effect on the U.S. from recent phone hacking reports. In legal terms, it would be interesting to see what Rupert Murdoch's mention at a media ethics panel last week of a cover-up of the phone hacking scandal by some at News International will lead to. He said that could turn up the heat on the company especially if recently discussed U.S. lawsuits on hacking are filed. Tuesday's parliamentary report also hinted at a cover-up.

"Assuming that there is evidence that employees of News Corp. were also engaged in phone hacking in the U.S., the fact that it was apparently covered by a higher level employee would substantially increase the probability that the U.S. government would not only seek the indictments of the employees involved in the hacking and the cover-up, but would also seek to indict News Corp.," he said.

Tuesday's report called out former News International and Dow Jones boss and long-time Murdoch ally Les Hinton as one of the people who had misled the U.K. parliament. The others were former News of the World editor Colin Myler and top lawyer Tom Crone. The committee said it was up to the parliament to decide what would happen to them. The House of Commons could call them in to publicly apologize, some U.K. media reported. Legal implications were less clear though.

One U.K. industry observer who didn't want to be named suggested that the top leadership, including Rupert and James Murdoch, would not feel any legal or other heat from Tuesday's report beyond maybe a public black eye. They may have been found to have failed investigating the phone hacking allegations properly and encouraging a culture, in which phone hacking could happen, but they were not found to have misled parliament. And they were not found to have known about the extent of hacking, observers emphasized.

Observers also highlighted that the committee approved its final report in a six-to-four vote that was largely along party lines. Conservative Party member Louise Mensch, who sat on the committee, told Sky News that the description of Murdoch as not fit might allow the company to highlight the partisan divisions on the committee as Conservatives voted against that part. She argued that this could be viewed as an “attempt to influence Ofcom” and ultimately could allow News Corp. to get off the hook in terms of any possible U.K. fallout.

Media analyst Claire Enders also told Sky News: "For the management of News Corp., the high-jacking of the report for political purposes is something they would have seen as a great sigh of relief." About the committee's ability to comment on BSkyB and Murdoch's fitness to own part of it, she said it was "way outside [its] brief…As far as I know, Rupert Murdoch has never been actively involved in BSkyB."

Greenfield, in his report entitled Why "Bad" Would Be "Good" for News Corp. Shareholders," also commented on the potential reduction in the conglomerate's stake in BSkyB, and took a more bullish view than Gould.

"We continue to believe News Corp. being declared “unfit” to own/control media assets in the U.K. would ultimately be viewed positively for News Corp. shareholders," Greenfield wrote. "News Corp. has never received full credit for the value of its unconsolidated BSkyB investment, and an auction of News Corp.’s voting control stake in BSkyB would likely generate meaningful incremental value to News Corp. investors."  

Also, News Corp.’s stock market valuation "would benefit from simplicity" as investors tend to dislike conglomerate structures and "increased cash on hand would continue to enable a robust share buyback," Greenfield said.

The analyst also expressed hope that the conglomerate could end up deciding to sell off its U.K. newspapers as investors have long expressed hope to reduce the firm's exposure to a business with growth challenges. "The business has become significantly less profitable since the closure of News of the World with overhead bloated relative to the division’s remaining revenues," Greenfield said.


Twitter: @georgszalai