More trouble ahead for Murdoch

The UK committee has carefully chosen words to describe the Murdochs that neatly fit into two other investigations – the UK Ofcom investigation into BSkyB and the separate US Justice Department investigation.

The UK independent regulator and competition authority for the UK communications (Ofcom) is investigating whether the Murdochs and News Corporation are "fit and proper” to hold a UK broadcasting license. The parliamentary committee found Rupert Murdoch was "not a fit person”. In my opinion Ofcom can now only reach the same conclusion. Ergo, News Corp will be forced to sell down its current 39 per cent controlling position in BSkyB to probably a maximum 15 per cent.

Nor will the Murdochs ever be allowed back. The further conclusion is that there is now a sharemarket overhang in BSkyB. At current pricing BSkyB represents about 12 per cent of News Corp's valuation.

Once having been found to be "not fit and proper” in one jurisdiction, it will be hard for other jurisdictions such as the US and Australia to ignore such findings. The US Fox TV network, which represents a far more significant 58 per cent of News Corp's current value, is therefore at risk. In Australia, News Corp has been suggested as a possible lifesaver for long-suffering Ten Network shareholders. I don't think so.

The second choice of words from the UK committee is even more dangerous. The committee found Rupert himself "turned a blind eye and exhibited willful blindness to what was going on in his companies and publications.” The US Justice Department is investigating whether News Corporation and its directors have breached the Foreign Corrupt Practises Act. Financial penalties for breaching this Act can be severe – for example, 2-4 per cent of sales. Calculated on News Corp's $34 billion of sales, that would be a financial penalty of around $1 billion. High, but chump change given the group's $9 billion cash hoard.

But penalties also include jail time for directors who knowingly violated the Act. This can be evidenced by, you guessed it, willful blindness. Thus the words used by the UK committee square pretty well with the US Act. They are certainly gunning for Rupert and in my opinion he is facing jail time if the US accepts the UK Committee's findings.

The UK Committee report also puts into context News Corp's emasculation of non-US shareholders two weeks ago. That nifty manoeuvre allows the Murdoch family to control over 50 per cent of the News Corp votes with as little as 12 per cent of the shares (assuming only 75 per cent of other shareholders vote).

There are many in the sharemarket who think the UK developments are good for News Corp because they will speed up the exit of the Murdochs from the group. This ignores the little gerrymander the family members have created for themselves. In my opinion the Murdochs may end up in jail, but that doesn't mean they will lose control of News Corp.

Optimistic shareholders are forgetting the descriptions used by some members of the UK committee to describe News. Words such as "criminal organisation” and "mafia” were bandied about. The Leveson Inquiry heard last week how Justice Eady described the tactics employed by the now closed News of the World in the Mosley sex scandal as little more than blackmail. Indeed, like a naughty school boy, Rupert was given some homework by Justice Leveson to directly address the findings of Justice Eady and report back.

Following a long and extensive interaction with News, I decided years ago it was non-investment grade. Now many others have come to the same watershed I did many moons ago when I was at Deutsche Bank. Today every institution, every shareholder, every analyst, stockbroker and indeed every advertiser has to face up to the same issues. They have to ask themselves: What is the red line a company must cross before it becomes non-investment grade? Advertisers have to ask themselves: What is the red line a media company must cross before it can no longer be dealt with commercially?

Rupert has had many nicknames through the decades. The early 'Boy Publisher' gave way to the longer lasting 'Dirty Digger'. 'Sun King' has been popular over the last several decades. But maybe in the end he will just be remembered as simply being "not fit and proper”; as a man who was "willfully blind”. After 60 years of hiring and firing prime ministers and presidents as it suited him, that thought must weigh heavily.

Mike Mangan has analysed News Corp as both a stockbroker and fund manager for over 20 years. From 1994-2004 he was consistently ranked as a Top 3 News Corp analyst.