News Corp. Staving Off a Scandal

Last Monday, British investigators said that News Corporation’s British tabloid, The Sun, had participated in widespread bribery to “a network of corrupted officials.” Then on Wednesday, the widening inquiry into illegal activity at News Corporation’s British newspapers led to James Murdoch’s resignation as head of the company’s embattled British publishing unit. What happened back in New York? News Corporation’s stock went up. The wave of incriminating headlines and the surging stock price reflect the cognitive dissonance generated by News Corporation’s phone hacking scandal. Even while Rupert Murdoch, the company’s chairman and chief executive, has doubled down on one of the newspapers at the center of the worsening scandal, creating a new Sunday edition of The Sun, investors have been cheering the possibility that the negative news in Britain could prompt the company to spin off its newspapers. Last Tuesday, Chase Carey, News Corporation’s chief operating officer, said at a Deutsche Bank media conference in Palm Beach, Fla., that within the company “certainly there are a number of parties who feel — would push to looking at a way to spin the publishing business separate from the rest.” James Murdoch’s resignation from News International inextricably links Mr. Carey to the British newspapers, properties he technically oversaw before but had little interest in, according to people with knowledge of the internal dynamics at the company. News International’s chief executive, Tom Mockridge, will now report directly to Mr. Carey, having previously reported to James Murdoch. “Chase has no exposure whatsoever to the newspaper business, and Mockridge is a straight arrow,” said one of the people, who like the others requested anonymity to speak candidly about the company. “Either Chase learns the business, or they spin off the papers and Mockridge runs the new company.” A News Corporation spokeswoman pointed to Mr. Carey’s defense of the newspapers at the conference in Florida, in which he said: “Our focus right now is in managing these businesses and improving their profitability.” Wall Street has long disliked News International, publisher of The Sun and the closed News of the World. The unit accounts for less than 3 percent of News Corporation’s profits and brings outsize troubles. Analysts estimate that the cost of legal fees and settlements related to the hacking crisis could reach $1 billion. News Corporation has a market capitalization of $49 billion. Other than newspapers, the company’s assets like the Fox network, the Fox studios and cable channels like FX accounted for nearly 90 percent of its $2.9 billion in profit in the six months that ended Dec. 31. “Wall Street would love it even if negative news drove to a sale or separation of the newspaper group,” said Richard Greenfield, a media analyst at BTIG. On Friday, News Corporation closed at $20.15, up 46 percent from a 52-week low of $13.83 reached last summer at the height of the revelations about phone hacking at News of the World. Shares have gained about 10 percent in the last 12 months. The company is unlikely to spin off its newspapers as long as Mr. Murdoch, who turns 81 next week, runs the company. He is often said to have newspaper ink in his veins. “He’s not even considering that path,” said one former executive at News Corporation who requested anonymity to talk about internal debates at the company. On Feb. 26, Mr. Murdoch introduced The Sun on Sunday, partly to make up for the lost revenue at the closed News of the World, where reporters repeatedly hacked into voice mails. The creation of The Sun on Sunday, which Mr. Murdoch said sold 3.26 million copies in its first week, also sent a message to News Corporation executives that, like it or not, Mr. Murdoch was sticking with the British publishing business. (The company has not discussed spinning off News Corporation’s print assets in the United States like The Wall Street Journal, published by Dow Jones & Company, and The New York Post, according to people with knowledge of discussions within the company.) “He’s a combative guy,” Barton Crockett, a media analyst at Lazard Capital Markets, said of Mr. Murdoch. “He’s going to fight hard to stay relevant in the publishing business in the U.K., and I think investors are somewhat fearful about that.” To ease investors’ concerns about the print business, News Corporation in July approved a $5 billion stock buyback program led by Mr. Carey. As of Feb. 7, the company had bought $2.7 billion of its own Class A shares. Last week Mr. Carey said he planned another buyback when the current one ends in June. “We certainly have an undervalued stock, to me a woefully undervalued stock,” Mr. Carey said at the Deutsche Bank conference. “We think of another buyback to make sense.” James Murdoch, Rupert’s younger son, has long been viewed as his father’s heir apparent. James now works from News Corporation’s New York headquarters, a move first announced last March. As the company’s deputy chief operating officer, he oversees the company’s lucrative international pay-cable channels like Star TV in Asia, Sky Deutschland and Sky Italia. News Corporation predicts that Fox International Channels will bring in $1 billion in operating income by the fiscal year 2015. “The Fox International business plus the Star India business, which is run separately and reports directly to James Murdoch, we are the leaders in the international markets amongst the U.S. multinational media,” David Haslingden, president and chief operating officer of Fox Networks Group, told analysts at a conference the day James Murdoch resigned from the publishing unit. James’s position in New York does not sit well with some shareholders who have called for his removal from News Corporation’s board. “Responsibility for this debacle ends with the board,” said Michael Pryce-Jones, a spokesman for the CtW Investment Group, a shareholder activist group in Washington that works with pension funds for large labor unions like the Teamsters. “This is a governance issue, and obviously much of the burden falls upon James given his role as a key executive.” There is no clear end in sight to the scandals embroiling the company, as British investigators continue to inspect documents turned over by News Corporation’s management and standards committee. If the accusations of bribes authorized by “people at a very senior level within” The Sun to elected officials, the British police and the military are true, it could lead to heightened scrutiny in America. The Foreign Corrupt Practices Act makes bribery of international officials by American companies and their foreign subsidiaries a criminal offense. In a statement released last Monday, Rupert Murdoch said the bribery practices explained in the investigation were “ones of the past, and no longer exist at The Sun.” That defense signaled that he saw a future for his besieged tabloid. “Rupert is unlikely to make decisions when backed into a corner,” said Doug Mitchelson, an analyst at Deutsche Bank Securities. “If they ever spun off print, it’d be because he fixed it and wanted to highlight the value of print, not to remove the cancer from the organization.”