Murdoch’s UK crisis could bring big indirect costs

July 6, 2011

By Chris Hughes
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

For News Corp shareholders, the penny has dropped. The phone hacking crisis engulfing the U.S. media group’s UK Sunday tabloid comes with a price. The stock opened down 3.2 percent on July 6, erasing $2.3 billion of market value.

The immediate costs of the matter are probably manageable for a company with around $3 billion of annual earnings. Advertisers are pulling business from the News of the World, the paper at the center of the storm, and a reader boycott is possible. But News Corp’s total UK newspaper operations contribute only about 4 percent of group sales and barely break even. London-based Enders Analysis puts the annual pre-tax profit contribution of the News of the World and its weekday sister paper The Sun at just 86 million pounds. News Corp could clearly cope with a loss of readers and ad revenue.

The group will also have to swallow the expense of settling with victims of alleged phone hacking. The actress Sienna Miller was recently awarded 100,000 pounds ($160,000). Two hundred more settlements at the same rate would cost 20 million pounds.

But bigger potential costs come with News Corp’s ambitions to take full ownership of BSkyB. The price may now rise if the hacking row stiffens the resolve of the satellite broadcaster’s independent directors. A deal was previously expected at 900 pence to 950 pence a share. If Murdoch now has to pay 10 pounds a share, the extra cost would be 795 million pounds over the midpoint of the lower range.

Then there is a small risk that the UK regulator revokes BSkyB’s broadcasting license. It could if the outcome of the investigations now underway makes it believe that News Corp isn’t a “fit and proper” owner or part-owner. That in turn would lead to forced divestiture of BSkyB. But this looks unlikely given the regulator’s criteria are designed to exclude certain categories of owner — for example political groups — and focus on existing breaches of UK broadcasting law rather than criminality per se.

That leaves the costs of poor governance. News Corp stock already labours with a “Murdoch discount” of about 30 percent compared to peers on an enterprise value to EBITDA basis. This is a $10 billion burden which, in theory at least, reflects concern that Murdoch isn’t shareholder-friendly.

In cash terms the UK newspapers — which also include The Times and The Sunday Times — are little more than a rounding error for News Corp. Greater economic value may have come because they gave Murdoch power and influence in Britain, and that may have helped him establish his broadcasting operations. But if Murdoch overpays for BSkyB or loses the deal because he addresses the problems in UK print with weakness or sentimentality, the discount deserves to widen.

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