Inside News Corp.’s Jockeying for Britain’s BSkyB

The takeover is nearing completion

After more than a year, News Corp.’s takeover bid for British satellite broadcaster BSkyB is nearing completion. Britain’s culture secretary, Jeremy Hunt, gave his approval for the takeover last Thursday, subject to some tweaking of the conditions and a new consultation of market rivals that will run until July 8. Assuming that News Corp. and BSkyB can agree on a price, the purchase seems likely to be concluded by mid-October.

Last June, when Rupert Murdoch’s News Corp. launched its bid for the 60.9 percent of BSkyB that it doesn’t own, it had its eyes on the satellite broadcaster’s revenue and profit figures. These would boost News Corp.’s own balance sheet, it has been estimated, by 25 percent in revenue and 30 percent in profits. By December of last year, the European Commission had ruled that there were no competition issues arising out of the bid since News Corp. already had a controlling interest in BSkyB. So all that remained was for the culture secretary to consider the matter of media plurality: Would the takeover reduce the mix of voices delivering news in the U.K. to a level that damaged the public interest? He decided to consult the people.

Opponents to the takeover have included not just rival broadcaster the BBC, telephony and Internet service provider BT, and the companies that publish the Guardian, Telegraph, Mirror and Mail newspaper titles, but also the citizens’ advocacy group Avaaz and even the Church of England. Indeed, it was the 40,000 responses to the culture secretary’s first consultation, most of them generated by Avaaz, that have delayed things until now.

Although James Murdoch is nominally in charge of News Corp.’s bid process, the British media and public continue to portray Murdoch as the bogeyman. Avaaz, which is considering whether to take the culture secretary to court and seek a judicial review of his decision, protested outside the Department of Culture’s offices yesterday with puppets of Hunt and Prime Minister David Cameron being controlled by a man wearing an enormous grinning Murdoch head. Judging by the comments posted on news websites yesterday and today, Murdoch still has the power to engender fear and loathing on a gargantuan scale.

And what of Jeremy Hunt’s added conditions? They are not reckoned to be very demanding. One is to have an independent editorial director present at Sky News board meetings. Anyone familiar with Rupert Murdoch’s career in the media business will know that he eats independent directors for breakfast. The Times of London and its sister paper had independent editorial directors who were ineffective, and when similar safeguards were offered during Murdoch’s bid for The Wall Street Journal, Times journalist Fred Emery recalled Murdoch’s response when reminded of his promise not to fire Times editors without the approval of its independent directors: “God, you don’t take all that seriously, do you?” The other condition Hunt has imposed has been a doubling of the period from seven to 14 years during which BSkyB must give Sky News brand licensing through cross-promotion on its other channels.

But few commentators expect the process to be upset at this stage, and the main sticking point now is the price at which the other shareholders will sell their holdings. One of the key motivations for News Corp. in launching the bid last year was the advantageous dollar-sterling exchange rate. News Corp. had a cash pile in America, and U.K. sterling assets were cheap. Already the delays are said to have cost News Corp. dearly, as the pound has gained against the dollar in the meantime.

In June of last year, when BSkyB stock was trading at below £6 ($9.6), News Corp. offered £7 a share ($11.2), which would have meant an overall bill of £7.8 billion ($12.5 billion). Now, however, BSkyB stock stands at a penny or so below £8.50, suggesting that News Corp. will have to offer about £8.75 (around £9.3 billion, or $14.9 billion, overall).

Back in March, it was reported that Fidelity, one of the fund managers with a substantial investment in BSkyB, was seeking an investment bank to assist it in securing the highest possible price. Other funds that were said to be anxious to extract maximum value from their share holdings were Blackrock and New York-based Taconic Capital Advisors.

One of the more gung-ho BSkyB shareholders is hedge-fund manager Crispin Odey, of Odey Asset Management, which has a 2.7 percent stake in BSkyB. Based on BSkyB’s recent record profits, he puts the overall value of the company at £19 billion ($30.5 billion). He is thought to be holding out for an £11 price tag for his shares (which, if extrapolated, would raise the total cost of News Corp.’s bid to well over £11 billion, or $17.6 billion). Odey is Rupert Murdoch’s former son-in-law, having been married at one time to Murdoch’s daughter by his first marriage, Prue. With no known animus towards Murdoch, Odey is treating it as merely a matter of business.

Yet News Corp. has plenty of room for maneuver. It currently owns 39.1 percent of BSkyB, and if it can agree to a price with just half of the other shareholders, that would take its stake to 75 percent. Once that is achieved, News Corp. could resort to the nuclear option of forcing a delisting, which would in turn force hedge funds and other fund managers to sell, since many of them are required by their own rules of governance to deal only in listed securities. Beyond that, if no deal has been reached within five months of regulatory approval having been granted, News Corp. would have to forfeit a penalty payment of $61.8 million to BSkyB but would thereafter only require 50.1 percent of shareholders’ votes to secure the takeover.

The question remains: Just how far are BSkyB’s recalcitrant shareholders prepared to go in order to rain on Rupert’s parade?