News Corp. investors who shunned the prospect of a drawn-out $12 billion bid for British Sky Broadcasting on Wednesday cheered when the company dropped its bid amid an uproar over alleged phone-hacking by its U.K. papers.
Although analysts said the takeover of profitable BSkyB would have been the best use of the company's growing mountain of cash, dropping the bid before British politicians were to formally oppose it ends the uncertainty and opens the door to other shareholder-friendly moves like increased dividends and share buybacks.
The company's deputy chief operating officer, Chase Carey, called off the bid on Wednesday, following more than a week of public outrage after it was learned that reporters at the News Corp. tabloid News of the World had hacked into the cellphone voice messages of a missing 13-year girl who was later found to be murdered.
In an attempt to contain the crisis, News Corp. shuttered the 168-year old tabloid on Sunday, but other hacking claims involving other News Corp. papers have continued to roil the company.
With the major political parties united, the U.K. Parliament was about to hold a non-binding vote opposing News Corp.'s BSkyB bid amid questions about whether the company's executives were fit to take control of the country's largest broadcaster.
On Monday, the British government referred News Corp.'s bid for BSkyB to competition authorities, where it would have been tied up for months in a review of whether too many key media outlets were controlled by one company.
"It has become clear that it is too difficult to progress in this climate," Carey said in a statement. He also clarified that News could not bid for BSkyB for six months unless another bid emerged.
After withdrawing its bid, News Corp.'s widely traded Class A shares rebounded 60 cents, or 3.9 percent, to $15.95 on Wednesday, though they are still down about 12 percent from early last week when the scandal exploded.
Standard & Poor's equity analyst Tuna Amobi said investors who had stayed on the sidelines were now jumping back into the company in the hope that dividends or share repurchases buoy the stock. He estimates the company now has about $15 billion in cash on its books, most of which would have been used to buy the 61 percent of BSkyB that it didn't already own.
The unraveling scandal also raised hopes that Rupert Murdoch, News Corp.'s chief executive and biggest shareholder, would finally entertain pulling out of the U.K. newspaper business, an arena that Murdoch adores, but which has become a smaller piece of the overall company's profits.
"The potential spin-off (of the U.K. papers), which was literally off the table prior to this scandal, may increasingly figure into some discussions," Amobi said.
Nomura analyst Michael Nathanson said in an analyst note that investors were shifting their attention back to News Corp.'s strong fundamental underpinnings, which reside in its U.S. cable channels, such as Fox News, its movie studio 20th Century Fox and U.S. broadcast network Fox.
Nathanson said he saw upside to the shares with a target price of $21. He also said it was time for the company to consider pulling out of the U.K. newspaper business. All of News Corp.'s newspapers, including the U.K. newspapers and The Wall Street Journal, accounted for less than 3 percent of its $1.06 billion in operating profits in the most recent quarter.
The Wall Street Journal, citing unnamed people familiar with the situation, said Wednesday that the company had informally explored selling all of its U.K. papers _ including the Sun, the Times of London and the Sunday Times _ but given their poor economics, there didn't appear to be any buyers.
A company spokeswoman declined to confirm the report.
"Perhaps this rebuke will force News Corp. to reconsider its ownership of U.K. newspapers," Nathanson said in the note. "We hope this is a turning point for the company's strategy and asset allocation as the ownership of highly inconsequential newspaper assets has forced the dropping of a strategically important asset."
As of March, News Corp. had amassed $11.8 billion in cash in preparation to buy the portion of BSkyB it didn't own, which would have boosted its profits and allowed News Corp. to count its revenue in the corporate total.
Owning BSkyB outright would also have increased its investment in the profitable TV business and lessened its overall exposure to newspapers, which have suffered amid a shift of advertising revenue to the Internet.
In the year through June 2010, BSkyB posted a profit of 878 million pounds ($1.4 billion) on revenue of 5.9 billion pounds ($9.5 billion).
Assuaging investor concerns about how it would use the cash if the BSkyB deal was delayed or called off, the company decided Tuesday to raise the amount of shares it buys back from the market to $5 billion over the next 12 months, up from a planned $1.8 billion.
Now that the deal is off completely, investors are looking for more insight into new ways the company will spend its money.
As for BSkyB, in which News Corp. still holds a 39 percent stake, shares closed 2 percent higher at 705 pence ($11.35), after trading around 680 pence when News Corp. said it was pulling its bid.
In the immediate aftermath of the statement, BSkyB shares sunk to a low of 665 pence, but that knee-jerk sell-off proved short-lived.
Speculators like hedge funds _ who were looking for windfalls from the prospect of a higher News Corp. offer _ are pulling out. At the same time, analysts said new investors are looking to buy up what has become relatively cheap stock for a company that is highly profitable.