Update: 1 p.m. EDT — News Corp (NSDQ: NWS). shares are now trading up over 4 percent.
British Sky Broadcasting shares fell sharply before rebounding Wednesday after News Corp. abandoned its bid to take full control over the broadcaster in the wake of the phone-hacking and police payments scandal that has rocked the media conglomerate. News Corp. shares, meanwhile, rose 2.36 percent in early trading as investors mulled whether the dropped BSkyB (NYSE: BSY) bid would help the media giant weather the growing scandal.
BSkyB shares have fallen over 18 percent since new revelations sent the scandal into overdrive last week, imperiling News Corp.’s bid. Many BSkyB shareholders, including hedge funds that hoped to make a killing on the deal, have now dumped their positions for huge losses. BSkyB shares are now trading at the same level as before the News Corp. bid.
James Dix, an analyst who covers News Corp. for Wedbush Securities, said the company’s decision to drop its bid for BSkyB removes some political risk for the company, and also frees up capital that can be used to buy back shares — the company announced a $5 billion buyback on Tuesday — or issue dividends.
“The Prime Minister came out opposing the deal, so withdrawing the bid takes that political football off the field, so that’s a benefit,” Dix said. “However, there is still the potential for more headline risk for the company,” he cautioned, adding that investors shouldn’t read too much into single-day stock moves.
Aside from the political furor, News Corp’s decision to drop the BSkyB bid frees up the $14 billion the company had been planning on using to buy the remainder of the satellite broadcaster it doesn’t already own. “Now they have excess cash,” Dix said, “so the question becomes, what do they plan on doing with it? This increases the possibility of getting a capital return in the form of stock repurchases of dividends, which I know a significant number of shareholders want.”
There’s been some speculation that News Corp. may seek to further distance itself from the scandal by selling News International, which publishes The Times of London, The Sun, and until last Sunday, News of the World. Dix said such a move could help alleviate more political risk, but noted that the U.K. newspapers represent a small portion of the media giant’s business.
“You have politicians who don’t like News Corp., so they could view [selling News Int.] as enough to declare victory and move on,” Dix said. “But the shareholders didn’t invest in News Corp. for the U.K. papers. They don’t create all that much value relative the rest of the company.”
As for the rest of News Corp.’s business, Dix sees the company weathering the scandal, despite the black eye. “The cable networks and the movie studio have solid operating management in place and generate so much cash flow that there’s no reason to think they will suffer,” he said.