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Hacking scandal tests Murdoch's political skills

News Corp investors have long tolerated a "Rupert discount" that factors in Rupert Murdoch's penchant for mixing politics and family with business, but a mismanaged scandal that forced him to close one of his UK newspapers on Thursday is now testing the limits of their faith.
/ Source: Reuters

News Corp investors have long tolerated a "Rupert discount" that factors in Rupert Murdoch's penchant for mixing politics and family with business, but a mismanaged scandal that forced him to close one of his UK newspapers on Thursday is now testing the limits of their faith.

The company shocked staff and observers by announcing the closure of the 168-year-old News of the World Sunday tabloid as ever more serious allegations emerged that its journalists had hacked voicemail messages of murder victims and bereaved relatives.

Even before Thursday's announcement, shareholders had been ditching stock in the world's biggest media conglomerate, wiping $1.2 billion off News Corp's market value in a single day on Wednesday, as British politicians who until now had been loyal to Murdoch dramatically changed their tone.

Prime Minister David Cameron, who has enjoyed the support of the Murdoch press, broke his silence and promised a public inquiry into what he called "disgusting" activities allegedly carried out by the News of the World tabloid.

That followed revelations that journalists from the Murdoch newspaper had hacked the voicemail of crime victims, including murdered schoolgirl Milly Dowler, turning a long-running scandal whose only known victims were celebrities into a national outrage.

"What the Dowler story did was to push the story of phone hacking into the street, down the pub, into the office," said George Brock, head of journalism at City University, London.

The turn of events heightened opposition to News Corp's proposed takeover of British satellite broadcaster BSkyB, which the government has so far supported, and prompted regulator Ofcom to issue a statement reminding the public it was monitoring the allegations closely.

"For any public authority that might possibly be involved, this is now potentially radioactive," Brock said.

Murdoch took the unusual step of issuing a personal statement of support for Rebekah Brooks, editor of the News of the World at the time of the Dowler hacking and a longtime protegee of the News Corp boss. Brooks is also a personal friend of Cameron and his wife.

The move highlights a tendency of the media mogul to protect his own, industry watchers say. Brooks is also the last line of defense before James Murdoch, 80-year-old Rupert's son and presumed heir and head of News Corp's European and Asian operations.

"He will reward loyalty with loyalty," said Steven Barnett... "It's a case of being one of us."

"If she has 100 percent backing from Rupert Murdoch, which is the word coming out of News Corp, then clearly she is untouchable and more importantly it shows that Murdoch himself thinks the company is untouchable," he adds.


Investors have now begun to worry that the outcry will delay or even derail final UK government approval of News Corp's $15 billion plan to take over BSkyB, a key strategic target that would be News Corp's most expensive acquisition ever.

The U.S. conglomerate is eager to consolidate BSkyB's steady cash flows from a loyal base of more than 10 million subscribers to balance its dependence on volatile advertising revenues from its cable, newspaper and television operations.

Could the tabloid scandal be the deal's undoing?

"This is pretty inexcusable," said one top 20 investor in News Corp who asked not to be named. "Clearly, it's troubling."

"Analytically, the UK papers represent less than 5 percent of the whole value so it shouldn't have an impact on the valuation of News Corp, but reputationally...?"

Nomura Securities wrote on Thursday: "Though we do not know if this is the beginning of a deeper problem, more in-depth review, or allowing time to cool public sentiment, this is obviously a negative for News Corp."

"That said, we have no way of knowing fully how this development will handicap the deal going forward as politics will surely take an increased profile in the debate," analyst Michael Nathanson wrote in a note.

British Culture Secretary Jeremy Hunt could yet refer the merger to the country's Competition Commission, although it is unlikely as he previously decided such a move was unnecessary and has since spent several months examining the deal himself.

A final public consultation on the matter ends this Friday, after which Hunt will go through the submissions and eventually issue a decision.

News Corp investors have pinned high hopes on the deal, which is expected to boost the company's earnings and cash flows at once.

"The estimated $15 billion acquisition of the balance of BSkyB will be a transformative event for News Corp and we believe that there will be a corresponding fundamental reassessment and revaluation," Evercore Partners analyst Alan Gould wrote in a recent note.

He blamed News Corp's significant trading discount compared to rivals on uncertainty about who would succeed Murdoch as CEO, and a risk of overpaying for assets, especially where prestigious publishing assets or family were involved.

"It is widely held that News Corp shares have carried a 'Rupert' discount due to succession issues and deals such as the DirecTV transaction with Liberty Media, the Dow Jones purchase, and to a lesser degree, the optics of purchasing Shine, a successful TV production company controlled by his daughter Elizabeth," Gould wrote.

Murdoch swooped in to buy Dow Jones, publisher of the Wall Street Journal, for $5.6 billion -- about a 65 percent premium -- just as the entire newspaper industry tipped into economic free fall in 2007.

News Corp wrote down half the value of the deal in 2009.


Even if Murdoch's company emerges from the scandal without major financial damage, this week may mark a loosening of the Australian-American's peculiar grip over British politics, an influence that he has not achieved in other markets.

"It's The Sun Wot Won It," his best-selling daily tabloid trumpeted in 1992, after Britain's Conservative party unexpectedly won a national election following a Sun campaign against left-wing Labor party leader Neil Kinnock.

A few years later The Sun switched sides to support Labor's new leader Tony Blair, who went on to win a landslide victory in 1997.

"It's never been lost on people, the myth that Murdoch created Tony Blair," says Ken Doctor, head of news publishing analysis at U.S. information research firm Outsell.

"This is in the culture and it basically says he is a powerful guy, he can make or break somebody."

City University's Brock says politicians in Britain do not need to be friends with Murdoch but they fear being his enemy.

"They can live without the support but what they absolutely don't want is the unrelenting hostility of popular printed media," he says.

Murdoch controls more than a third of Britain's newspaper market with The Sun and News of the World tabloids together with the Times of London and Sunday Times broadsheets.

In the far more fragmented U.S. market, his influence over politicians is weaker, although News Corp's right-wing Fox News channel has helped drive the Republican agenda and was instrumental in creating the populist Tea Party movement.

In Germany and Italy, where News Corp has pay-TV operations, Murdoch is viewed with suspicion if not outright hostility and is commonly referred to in both countries as "the shark."

Two attempts by News Corp to buy German publisher Axel Springer in the 1960s and 1980s both failed, and a Sun-style tabloid named Super! Zeitung launched in Germany to rival Springer's Bild in 1991 collapsed after six months.

In Italy, Murdoch has never stood much of a chance in terms of political influence against Silvio Berlusconi, the country's prime minister and domestic media magnate whose family owns the country's largest private broadcaster, Mediaset.

That has not prevented him from taking on Mediaset with Sky Italia, pitting his son James Murdoch against the Italian premier's son Pier Silvio Berlusconi, who is Mediaset's vice chairman.

"There are very few like Murdoch these days," said analyst Doctor. It's mostly corporate owners. There are so few single-minded media tycoons left who will go after BskyB or go after the Wall Street Journal and just be single minded about it."

"But with the continuing revelations, we see crossing the line and being blind to the line. Murdoch's DNA is get the story however you're going to get the story, which is a throwback to almost 100 years ago. Go get the story, whatever it takes."