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BSkyB Faces $4.2 Billion Payout Quandary on Murdoch Scandal

British Sky Broadcasting Group Plc (BSY)’s board of directors faces a dilemma over a potential 2.6 billion- pound ($4.2 billion) payout to shareholders that would also go to Rupert Murdoch’s News Corp. (NWSA), the company whose bid for BSkyB collapsed because of a phone-hacking scandal.

The 14-person board, chaired by son James Murdoch, will on July 28 consider a one-time dividend to investors, said a person familiar with the matter, who asked not to be named because the meeting is private. BSkyB stock dropped 17 percent in seven days before the hacking allegations forced News Corp. to shelve its offer for full control of the U.K. pay-TV company. News Corp. is BSkyB’s biggest shareholder with a 39 percent stake.

“They’ve ended up in a position where they can’t do the right thing, because that involves doing the wrong thing by some people,” said Chris Bryant, the opposition Labour lawmaker who is suing News International, the News Corp. unit that published the News of the World, the newspaper that was closed down this month as the phone-hacking crisis engulfed Murdoch’s media empire.

BSkyB shares soared as high as 850 pence before the Guardian reported on July 4 that News of the World employees intercepted murder victim Milly Dowler’s voice mails in 2002.

Photographer: Chris Ratcliffe/Bloomberg

The last time BSkyB shares fell more over a seven-day period was in August 2004, when James Murdoch, then chief executive officer, announced an expanded spending plan, a target for more than 10 million subscribers and returning cash to shareholders via share buybacks. Close

The last time BSkyB shares fell more over a seven-day period was in August 2004, when... Read More

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Photographer: Chris Ratcliffe/Bloomberg

The last time BSkyB shares fell more over a seven-day period was in August 2004, when James Murdoch, then chief executive officer, announced an expanded spending plan, a target for more than 10 million subscribers and returning cash to shareholders via share buybacks.

1,000 Pence

Closing at 739 pence in London yesterday, the stock was still 13 percent below that level and 26 percent less than the 1,000 pence Citigroup Inc. analysts said in March News Corp. might eventually pay. New York-based News Corp. had bid 700 pence, or 7.8 billion pounds in total, for the remaining 61 percent stake.

BSkyB slid 11 pence, or 1.5 percent, to 728 pence as of 8:51 a.m. in London.

BSkyB declined to comment on the board meeting or any possible dividend plan. Alice Macandrew, a News Corp. spokeswoman in London, declined to comment when asked about News Corp.’s position on a BSkyB dividend.

Bloomberg LP, the parent of Bloomberg News, competes with News Corp. units in providing financial news and information.

London-based BSkyB could pay 80 pence a share in special dividends using its own cash, said Lorna Tilbian, an analyst at Numis Securities, who recommends buying BSkyB shares. The dividend could reach as much as 150 pence if the board opts to increase the ratio of its net debt to earnings before interest, taxes, depreciation and amortization to two times, she said.

Cash Flow

“Pressure is on the board to do something and the most obvious sign of that would be a cash return,” said Derek Mitchell, a fund manager at Royal London Asset Management, which holds BSkyB shares through its index funds. “Sky is such a cash generative vehicle. They’ve got to the end of their investment phase, which is why Murdoch wanted to take it over. So it seems an obvious move.”

While BSkyB was in a year-long offer period, its board didn’t consider changes to its capital structure, the person said. BSkyB’s nine-month free cash flow climbed 60 percent to 615 million pounds from a year earlier.

The company may say July 29 earnings before interest and taxes rose 29 percent to 1.05 billion pounds in the year through June, helped by the addition of high-definition TV subscribers, according to the average estimate of 12 analysts surveyed by Bloomberg. BSkyB may propose a final dividend of 12.6 pence, bringing the full-year total to 21 pence, the survey shows.

Dividend Yield

The broadcaster trails European rivals in rewarding investors. BSkyB’s gross dividend yield of 3 percent over 12 months is half of that for Germany’s ProSiebenSat.1 Media AG. (PSM) RTL Group SA’s stock yields 7.3 percent, while Mediaset SpA (MS) reached 11 percent, according to data compiled by Bloomberg.

The last time BSkyB shares fell more over a seven-day period was in August 2004, when James Murdoch, then chief executive officer, announced an expanded spending plan, a target for more than 10 million subscribers and returning cash to shareholders via share buybacks.

The pay-television provider is unlikely to repurchase shares this time as a buyback would increase News Corp.’s own holding, Numis’s Tilbian said. “Given that they’re being investigated, shareholders will not want them to have a creeping shareholding.”

News Corp. is dealing with three probes by police and regulators into phone hacking at the News of the World. At least 10 people have been arrested, including former News International CEO Rebekah Brooks and ex-News of the World editor Andy Coulson, who was Prime Minister David Cameron’s press chief until January. The scandal has wiped almost $4.8 billion off News Corp.’s market value since July 4.

Board Changes?

“My smell of it is that it wouldn’t be appropriate even if it might make sense in business terms,” said Steven Barnett, a professor of communications at the University of Westminster in London, of a one-time BSkyB dividend. “The last thing they want is more bad headlines to pile up on the bad headlines they’ve had over the last two weeks.”

BSkyB’s board has also come under pressure to review James Murdoch’s role as non-executive chairman, after his testimony last week was contradicted by two former News International employees. While the hacking incidents took place before he started overseeing News International since 2007, he authorized settlements to hacking victims that are now being questioned.

As CEO of BSkyB, James Murdoch more than doubled the company’s profit in four years and increased sales by 42 percent as he drove the broadcaster beyond traditional pay-TV business.

Investor Backing

“If it hadn’t been for James Murdoch then Sky wouldn’t have been as brilliant as it is,” said David Stewart, CEO of Odey Asset Management in London, which holds 2.7 percent of BSkyB’s shares. “Unless the police find something we don’t see any reason for that to change.”

Some long-serving board members, including David Evans, the former Crown Media Holdings Inc. CEO who joined the board in 2001, may step down at the company’s annual general meeting in the fall, the person familiar with the situation said.

James Murdoch plans to attend this week’s board meeting and has no plan to step down as chairman, another person familiar with the matter said last week.

The 38-year-old also sits on the boards of Sotheby’s (BID), the largest publicly traded auction house, News Corp.-backed software company NDS Group Ltd. and GlaxoSmithKline Plc (GSK), the U.K.’s biggest drugmaker. Glaxo CEO Andrew Witty said today that Murdoch remains on its board.

“We’re of the view that we’d like to see various investigations run their course, so then the whole thing can come to a more considered conclusion,” Witty said on the drugmaker’s earnings conference call. “It’s important that we just wait for the facts to be established.”

BSkyB may still want to distance itself from News Corp. in the short term and delay a dividend for 12 months to 18 months instead, said Guy Peddy, an analyst at Macquarie Securities in London, who has a “neutral” rating on BSkyB shares.

“This news flow could draw BSkyB into the wider media frenzy,” Peddy said.

To contact the reporters on this story: Jonathan Browning in London jbrowning9@bloomberg.net; Amy Thomson in London at athomson6@bloomberg.net

To contact the editor responsible for this story: Kenneth Wong at kwong11@bloomberg.net

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