News Corp worries in US
Los Angeles - Emerging relatively unscathed from a British parliamentary hearing on the phone hacking scandal, Rupert Murdoch returned to the United States on Wednesday, where his company faces a host of financial and legal challenges.
As the scandal runs its course in the UK, Murdoch's News Corp must confront at least two US-based shareholder lawsuits, a possible Standard & Poor's credit downgrade, and the beginnings of a federal investigation.
The conglomerate Murdoch controls through a family trust owns a movie studio, a broadcast network, pay TV channels and newspapers around the globe. It made $33bn in revenue last year and generates about $2bn in cash every year. The company has the financial capacity to withstand fines or most other corporate calamities.
Even so, News Corp could face further damage to its standing. Standard & Poor's put the company on notice that it may cut its investment-grade "BBB+" credit rating in the next 90 days. The move could affect nearly $15.5bn in debt and raise the company's costs when it obtains loans in the future.
"We see increased business and reputation risks associated with the broadening legal inquiries going on," said Michael Altberg, the S&P analyst who issued the notice on Monday. Even after what some said was a good performance by Murdoch at Tuesday's hearing, those risks remain, Altberg said.
"There are reputational risks, which definitely could lead to the alienation of current and potential clients such as advertisers," he said.
9/11 hacking claims
News Corp, which is based in New York, has been called to task in the UK over alleged phone hacking and police bribery by journalists at its now-shuttered tabloid, News of the World. Ten people have been arrested so far in a scandal that has reached into the highest police ranks and the office of the prime minister.
With severe damage already done to his reputation and newspaper in Britain, Murdoch must guard against a similar backlash in the US now that the FBI is investigating whether News Corp employees bribed police officers to obtain information about victims of the 9/11 terrorist attacks.
Protecting News Corp's US franchise is crucial because it includes the company's crown jewels - the 20th Century Fox movie studio and television holdings that include highly profitable cable networks and 27 broadcast stations. Movies, broadcast television and cable television account for nearly 60% of News Corp's revenue and an even higher proportion of the company's earnings.
One of the biggest fears among investors is that more bombshells about the UK phone hacking scandal will drop in the US and detonate such widespread outrage that advertisers will stop buying TV spots on News Corp.-owned stations. There are worries, too, that moviegoers will boycott theatres showing 20th Century Fox films.
Ford Motor Co had pulled its advertising from News Corp's now-closed News of the World, the 168-year-old tabloid at the centre of the scandal. The auto maker has said it will continue to advertise in other News Corp properties in Britain pending the outcome of investigations.
Other advertisers also pulled ads from the tabloid before the company decided to close it with one last ad-free issue last week. So far there are no signs that the ad boycott has spread to News Corp's US properties such as the country's top-selling paper, The Wall Street Journal, or Fox News Channel.
Brands not fleeing
BTIG Research analyst Rich Greenfield thinks the scandal would have to get really sordid for advertisers to eschew News Corp's US holdings. Greenfield came to this conclusion after scanning the first 15 pages of News Corp-owned papers Times of London and the Sun Tuesday morning, the same day Murdoch appeared before Parliament to be grilled about the scandal.
The pages were filled with ads from major brands, including Ford, Tiffany & Co, British Airways, Volkswagen, ING Direct and HSBC.
"Given that brands are not even fleeing News Corp's (British) assets, we find it hard to believe they will pull away from News Corp in the United States ... unless facts emerge that illustrate far wider wrong-doing at the highest levels," Greenfield wrote on BTIG's website.
Robin Steinberg, an executive vice-president for ad agency MediaVest, said so far, she doesn't foresee any clients pulling out of The Wall Street Journal or New York Post, the other major US newspaper owned by News Corp.
"There is a difference between sensationalised journalism and business journalism, and (papers in the US and UK are also) separated by a large pond of water," Steinberg said. "The practices overseas are very different than the practices here. To date I'm not concerned with the practices The Wall Street Journal represents. I'm confident in the credibility of their journalistic approach."
In a sign investor worries may be easing, News Corp's shares have rallied in the past two days. The stock price still remains down by 12% since the scandal's scope widened at the beginning at the month.
Definitions of unacceptable behaviour
The US investigation into alleged misconduct could threaten the broadcast licenses of Fox's TV stations. The licenses could be jeopardised if the Federal Communications Commission decides Murdoch or his top executives violated the agency's "character" policies.
The definitions of what constitutes unacceptable behaviour for corporate license holders are murky, although "criminal misconduct involving false statements or dishonesty" and felony convictions are viewed as factors that could affect an FCC license.
If the FCC tried to pull News Corp's TV licenses, Citigroup analyst Jason Bazinet believes the company would be given the opportunity to sell the stations instead. In that event, Bazinet estimates News Corp. could fetch $4bn for the stations, after taxes.
Even more serious legal headaches loom.
Last week, at the urging of New York congressman Peter King and other lawmakers, the FBI began a preliminary inquiry into a report that News Corp employees tried to hack into phones belonging to victims of the September 11 2001, attacks.
News Corp also faces significant risk from a 1977 US law called the Foreign Corrupt Practices Act, which makes it illegal to bribe foreign officials in order to obtain or retain business.
Allegations that News of the World bribed British police for story tips could fall under the act, said Mike Koehler, an expert on the Foreign Corrupt Practices Act and assistant business law professor at Butler University.
Such an inquiry by the Justice Department could take years and cost the company millions to defend, especially if it is forced to answer questions about News Corp's global operations that reach into India, Australia, Germany, Italy, the UK and the US, he said.
"A lot of times, these inquiries tend to mushroom exponentially," Koehler said.
An FCPA co-ordinator with Justice's criminal fraud section said last week that the department does not discuss the existence or status of investigations as a matter of policy.
Elsewhere on the legal front, two recent lawsuits filed by News Corp shareholders are using the phone-hacking scandal to bolster allegations that Murdoch has been mismanaging the company for years. The suits claim Murdoch operates without fear of being accountable to the company's board of directors, who are beholden to him.
News Corp's board is girding for a long fight as well. Last weekend, the nine independent members of the 16-member board hired corporate law firm Debevoise & Plimpton LLP to advise them on how to oversee the internal committee set up to investigate the UK allegations.
Board backs Murdoch
The directors wanted legal advice that doesn't come from the company, according to a person familiar with the matter, who requested anonymity because of the sensitivity of the matter.
On Tuesday, independent members of the board gave Murdoch their full backing.
The longer the crisis drags on, the more people appear to believe the 80-year-old CEO's time at the company's helm is getting shorter.
Brokerage Cowen & Co analyst Doug Creutz upgraded his rating on the shares to "outperform" on Wednesday, saying the 25% chance that Murdoch will exit the company would improve its focus on building share value rather than "dynastic empire building".
The shareholder lawsuits also refer to a "Murdoch discount" dragging down News Corp's market value.
But Murdoch has made it clear he intends to tackle the challenges at the company that he has spent his entire career building. He told a committee in Britain's Parliament on Tuesday that he believes he is best suited to clear things up, and a Saudi prince who owns a 7% stake in News Corp issued a statement on Wednesday expressing his support for Murdoch.
"I continue to see News Corp as a valuable and long term investment and remain both supportive and confident in the leadership of Rupert and (his son) James Murdoch," Prince Alwaleed bin Talal Alwaleed said.