LOS ANGELES (AP) — Rupert Murdoch’s decision to close the 168-year-old weekly British tabloid at the center of a phone-hacking scandal is an example of what the controlling shareholder of News Corp. does best — seize the news agenda, and when necessary, cut his losses.
He’s also got his eye on a much bigger prize.
The surprisingly bold move to shutter News of the World, a financial pipsqueak, is the best way to stem the flow of damaging headlines at rival newspapers and clear regulatory hurdles that stand in the way of News Corp.’s pending multi-billion-dollar acquisition of British Sky Broadcasting, a cash cow that will boost earnings of the media giant.
“This is, to me, Murdoch taking back control,” said Louise Cooper, a markets analyst at London-based BGC Partners. “The whole thing is an utter mess. He’s trying to make the best of it he can.”
Murdoch, 80, has a long history of daring business decisions. He was born in Australia, the son of a newspaper magnate, and started his own newspaper empire there. He’s purchased assets, like Wall Street Journal owner Dow Jones & Co., and created others from scratch, like the Star tabloid and Fox broadcast network.
As the company’s chief executive, Murdoch presides over an empire with a wide array of media assets, including the Fox broadcast network, cable channels such as FX and Fox News, TV stations, the 20th Century Fox movie studio and newspapers around the world, including The New York Post and The Sun in the U.K. Murdoch controls 40 percent of News Corp.’s voting stock, mostly through a family trust.
News of the World’s value as an enterprise is “a drop in the bucket” compared to News Corp.’s overall $46 billion market capitalization, said Collins Stewart analyst Thomas Eagan. Closing the paper is a small sacrifice to try to save News Corp.’s $12 billion proposal to takeover BSkyB, which still needs U.K. government approval.
“I think it assuages some of the concern over ongoing problems at ‘News of the World,'” Eagan said. “It’s unclear what it means for the actual (BSkyB) deal approval.”
The Sunday-only publication averaged 2.66 million readers per issue in May, according to U.K. auditing organization ABC. Eagan pegged the tabloid’s value at an optimistic $650 million, or 25 cents per share. That’s far less than the 70 cents that News Corp. shares have fallen since Wednesday when it was revealed the tabloid hacked into the voicemail of a murdered girl, potentially harming a police investigation and provoking the outrage of British politicians.
Shutting a newspaper amid an industry-wide decline in print advertising revenue and increasing its stake in a profitable and expanding pay TV company will actually improve News Corp.’s profitability.
Most analysts have a “buy” rating on the shares, thanks in part to an improving TV ad market, the recent decision to sell off money-losing social network Myspace, and its thriving cable channels such as Fox News.
Its TV channels, stations and 20th Century Fox movie studio accounted for practically all of the company’s $1.06 billion in operating profits in the third quarter through March. The publishing division containing newspapers such as The Wall Street Journal contributed $36 million, or less than 3 percent of the total, while Myspace and related Internet businesses lost $165 million.
News Corp. shares closed down just 4 cents at $17.43 on Thursday after being up most of the day following the announcement of the paper’s closure.
“At some point when the smoke clears, we’re optimistic that investors will ultimately return to analyzing News Corp. on the merits of its high-quality media business, which first and foremost include its TV businesses,” said Barclays Capital analyst Anthony DiClemente.
Still, the disposal of the paper is seen as a painful decision for Murdoch, a renowned news junkie. Several observers speculated that he will try to re-start a new British Sunday paper under a different name.
Murdoch evaded reporters’ questions at an executive retreat in Sun Valley, Idaho, on Thursday.
Some observers made note of the fact that his son James was the one who broke the news to News of the World’s some 200 staff. The elder Murdoch is seen as too attached to the newspaper business to shed it for good even though it is not core to the company’s profits.
“If history is a guide, the decision to reduce newspaper exposure dramatically will be a post-Rupert decision,” wrote Ken Doctor, a newspaper industry analyst at Outsell Inc., in a blog post Thursday.
The British government on June 30 already gave its qualified approval of News Corp. purchasing the 61 percent of BSkyB that it doesn’t already own, on the condition it spins off Sky News as a separate company.
News Corp. made an initial offer of 700 pence per share to buy the 61 percent of the shares it doesn’t already hold, valuing BSkyB at 12.3 billion pounds ($19.8 billion).
Analysts believe News Corp. may have to go as high as 900 pence per share to persuade shareholders to sell out.
At the time of the qualified approval, the tabloid’s headline-grabbing hacks appeared to be limited to celebrities and politicians, to whom it was prepared to pay compensation.
But public sentiment was inflamed anew after it was revealed this week that the paper’s targets included missing children, the relatives of soldiers slain in Afghanistan and the families of victims of London’s 2005 terror attacks.
The outrage prompted the U.K. media regulatory body, The Office of Communications, to release an unusual statement on Wednesday, confirming that “it has a duty to be satisfied on an ongoing basis that the holder of a broadcasting license is ‘fit and proper.'”
An investigation into whether News Corp. would pass this subjective standard of propriety was seen as potentially derailing Murdoch’s BSkyB bid.
Analysts see the BSkyB deal approval being delayed until at least September, as Culture Minister Jeremy Hunt is not expected to give his final go-ahead before the U.K. Parliament goes into recess on July 18.
Despite the public outcry, many analysts think Britain will still sanction the takeover, since officials have already said that threats to competition will be resolved with Sky News’ spin-off.