By Kate Holton
LONDON (Reuters) - BSkyB's complicated relationship with Rupert Murdoch's News Corp and whether son James should remain as chairman will likely dominate the firm's solid financial results due next week.
Investors who saw their shares fall over 20 percent at one point this month after a phone-hacking scandal scuppered News Corp's BSkyB takeover bid, will want to see some indication of a future return of capital to boost the value of the company.
However, a buyback of shares or special dividend would draw attention to News Corp's near 40 percent ownership of the British pay-TV operator at a time when a criminal scandal has engulfed Murdoch's empire and hammered the family reputation.
"It will be a tough decision for the board," said Panmure Gordon's Alex DeGroote, one of the first financial analysts to stress the increasing chances that the bid would fall apart.
"At a time when BSkyB should be hypersensitive about the links to News Corp, both a special dividend and the chairman's position are pertinent."
The 38-year-old James Murdoch took over as non-executive chairman of BSkyB in late 2007 after a highly successful four years as the company's chief executive, transforming the group from a pure-play TV operator to one that also offered broadband and telephony.
Several shareholders have told Reuters they are supportive of James as chairman but will want to discuss the situation.
"Our focus is how BSkyB moves forward," a top 20 BSkyB shareholder told Reuters on condition of anonymity. "We've got this on a watching brief, because if something dramatic happens then we'll need to have conversations with them.
"We're not pushing for anything as far as James Murdoch going or anything like that, but it will be a topic of conversation when we do talk to them. Our concern will be to make sure the business is structured sufficiently well to drive it through to make sure the perceived valuation and forthcoming revenues that we anticipate are protected."
BSkyB has performed strongly during the financial downturn, growing its customer base to over 10 million homes, and is set for a period of strong cash generation after James Murdoch led it through a heavy period of investment.
With the withdrawal of the News Corp bid for the 61 percent of BSkyB it did not already own, shareholders will want to see what will happen next with that cash.
"Cash distribution is likely to be a contentious issue as Sky nears zero net debt next year," Jefferies analyst Nick Bell said, adding that by gearing up to two times from the current 0.6 times net debt to core earnings could release 2.1 billion pounds.
"Under normal circumstances News Corp would be expected to block such a move (it is already flush with cash and any distribution is likely to a incur a substantial tax charge), but circumstances are far from normal at the moment.
"It may relent in order to assuage criticism of wielding too much control at Sky and also to help secure James Murdoch's position as chairman."
James was deemed to have given a good performance when he appeared before a high-profile British parliamentary committee this week to answer questions on the hacking scandal, but he has since come under renewed pressure after former staff at the tabloid at the heart of the problem contradicted a critical part of his testimony.
Merrill Lynch said it thought the company would opt for a special dividend instead of a buyback, as this would prevent News Corp from increasing its stake, but Panmure's DeGroote said he did not expect a firm commitment to be announced next week.
"I don't think it's in the company's interests to undertake share buybacks or a special dividend at this moment in time," he said. "There's the News Corp linkage but also I'm not convinced of the merit of injecting high levels of leverage at a time in which the earnings appear to be under modest pressure."
Others are hoping for at least some indication of a future payout, and expectations on the size of that sum have grown in recent days.
BSkyB is expected to post solid results Friday, but with subscriber growth slowing as the company focuses on cross selling products to existing customers rather than adding new ones in a tough consumer environment.
(Reporting by Kate Holton; additional reporting by Chris Vellacott; Editing by Chris Wickham and Will Waterman)