Will Murdoch quit Britain?

Maybe—but he might also take News Corporation private
July 20, 2011

Rupert Murdoch was willing to close a market-leading newspaper to save his British business, but it did not work. Might he now need to sacrifice his whole British operation to rescue his global media empire?

The News of the World had become more trouble than it was worth. Once major companies such as Asda, Boots and Sainsbury’s cancelled their advertising, a publication that had previously made £5m-£10m a year looked like becoming a loss-maker.

The fear was that opposition to Murdoch’s business would spread to his other operations. While the hacking allegations escalated and politicians denounced News International, judges started inquiries, and police stepped up their investigations, it would have been impossible to continue publishing the News of the World. What is more, it may have caused an advertising boycott to spread to his other papers—and to BSkyB. Since 2009 advertisers have been deserting Fox News, Murdoch’s US cable TV network, in protest at the Glenn Beck show. Beck recently left Fox.

Murdoch hoped that amputating the tabloid would once again halt the infection. But eventually, when he realised that his bid for the 61 per cent of BSkyB he didn’t own was politically impossible, he withdrew it.

This leaves his empire in a parlous state. The Times may have international prestige, but it and the Sunday Times lost around £42m last year, subsidised by an estimated £70m profit from the Sun. One option might be to combine the newsrooms of The Times and the Sunday Times, which would reduce losses, while launching a Sun on Sunday could recover some lost revenues. With the News of the World axed, the newspapers’ net contribution to the Murdoch empire will now be negligible, even before millions in compensation is paid to hacking victims.

It is television that now forms the bulk of Murdoch’s profits. BSkyB’s 10m subscribers generate an estimated £1.4bn profit. News Corporation does not share directly in profits, but receives 39 per cent of the dividends, totalling £139m. When Murdoch started Sky in 1989, it was regarded as something of a gamble—he was, after all, planning to sell television to a nation that already watched it for free. The move nearly bankrupted News Corporation. He had to give away half the company to buy and eliminate the competition. He then lost control when BSkyB was floated in 1994 to raise cash to repay debt, selling some of his shares during the deal. However Sky, with its sport and entertainment, has become a cash cow and his intention was to use the cash flow to underpin his expansion into European and Asian TV. The broadcaster was worth £10bn before Murdoch bid to regain control and the market was expecting him to pay at least £12bn. But now that he has dropped the bid for the majority, why keep the minority? When he is so unloved in London, Murdoch could dump his 39 per cent stake and use the proceeds in those parts of the world where he still thinks he is welcome.

He owns television channels from India to Australia, Italy and the US, plus 20th Century Fox films and HarperCollins books. Both film and books require cash up front; but books involve relatively small sums and films give fast payback. With these, Murdoch has been able to build a $12bn war chest. Much of this was earmarked for the BSkyB bid; but he is now spending the money where he thinks it will have most effect—on his own shareholders. Some $5bn of the Murdoch cash pile is now being diverted into a buy-back scheme.

This is for good reason: the drama in London has been covered closely by US networks. American investors have realised the company’s prospects of growing in Europe—and perhaps Asia and the US too—have collapsed. News Corporation shares fell 15 per cent as the scandal unwound in Britain, wiping $7bn off its value. The buy-back is intended to arrest this decline.

Yet, if the equity investors are losing faith in Murdoch, will he still have support from bankers when he next needs them? He owns Dow Jones, the Wall Street Journal and Barron’s, but the financial community has its concerns over not only News Corporation’s business but its governance too. Rupert is 80 and clearly plans to hand control to his son James, the man most recently responsible for running News International. James is also the chair of BSkyB and may now have to step down.

So might Murdoch Senior simply sell his newspapers and walk away? Perhaps—but who would buy them? Newspapers have always attracted vanity buyers seeking trophy assets or platforms for publicising political and social attitudes. Richard Desmond, owner of the Daily Express and the Star, said he offered £1bn for the Murdoch papers two years ago despite the monopoly considerations. Murdoch may rue his decision to turn him down. The price for News International now would be nearer the £1 that Russian entrepreneur Alexander Lebedev paid for the Independent—although there may be oil-rich Arabs or other oligarchs for whom buying football clubs is not enough. At worst, Murdoch could create and fund an independent trust to continue the papers. Or he may simply close them and, in doing so, leave the public poorer.

With its anachronistic non-voting shares that concentrate control in the family, Murdoch is running News Corporation—a public company—like a private fiefdom. The share buy-back will further increase the family share. Abandoning Britain would be a radical move, but taking News Corporation private could be the ultimate retreat for the besieged Murdochs.