News Corporation head Rupert Murdoch arrives at his Fifth Avenue residence, Wednesday, July 20, 2011, in New York. / AP Photo/Louis Lanzano
LOS ANGELES - Emerging relatively unscathed from a British parliamentary hearing on the phone hacking scandal, Rupert Murdoch returned to the United States on Wednesday, where his company faces a host of financial and legal challenges.
As the scandal runs its course in the U.K., Murdoch's News Corp. must confront at least two U.S.-based shareholder lawsuits, a possible Standard & Poor's credit downgrade, and the beginnings of a federal investigation.
The conglomerate Murdoch controls through a family trust owns a movie studio, a broadcast network, pay TV channels and newspapers around the globe. It made $33 billion in revenue last year and generates about $2 billion in cash every year. The company has the financial capacity to withstand fines or most other corporate calamities.
Even so, News Corp. could face further damage to its standing. Standard & Poor's put the company on notice that it may cut its investment-grade "BBB+" credit rating in the next 90 days. The move could affect nearly $15.5 billion in debt and raise the company's costs when it obtains loans in the future.
"We see increased business and reputation risks associated with the broadening legal inquiries going on," said Michael Altberg, the S&P analyst who issued the notice on Monday. Even after what some said was a good performance by Murdoch at Tuesday's hearing, those risks remain, Altberg said.
"There are reputational risks, which definitely could lead to the alienation of current and potential clients such as advertisers," he said.
News Corp., which is based in New York, has been called to task in the U.K. over alleged phone hacking and police bribery by journalists at its now-shuttered tabloid, News of the World. Ten people have been arrested so far in a scandal that has reached into the highest police ranks and the office of the prime minister.
With severe damage already done to his reputation and newspaper in Britain, Murdoch must guard against a similar backlash in the U.S. now that the FBI is investigating whether News Corp. employees bribed police officers to obtain information about victims of the 9/11 terrorist attacks.
Protecting News Corp.'s U.S. franchise is crucial because it includes the company's crown jewels the 20th Century Fox movie studio and television holdings that include highly profitable cable networks and 27 broadcast stations. Movies, broadcast television and cable television account for nearly 60 percent of News Corp.'s revenue and an even higher proportion of the company's earnings.
One of the biggest fears among investors is that more bombshells about the U.K. phone hacking scandal will drop in the U.S. and detonate such widespread outrage that advertisers will stop buying TV spots on News Corp.-owned stations. There are worries, too, that moviegoers will boycott theaters showing 20th Century Fox films.
Ford Motor Co. had pulled its advertising from News Corp.'s now-closed News of the World, the 168-year-old tabloid at the center of the scandal. The auto maker has said it will continue to advertise in other News Corp. properties in Britain pending the outcome of investigations. Other advertisers also pulled ads from the tabloid before the company decided to close it with one last ad-free issue last week. So far there are no signs that the ad boycott has spread to News Corp.'s U.S. properties such as the country's top-selling paper, The Wall Street Journal, or Fox News Channel.
BTIG Research analyst Rich Greenfield thinks the scandal would have to get really sordid for advertisers to eschew News Corp.'s U.S. holdings. Greenfield came to this conclusion after scanning the first 15 pages of News Corp.-owned papers Times of London and the Sun Tuesday morning, the same day Murdoch appeared before Parliament to be grilled about the scandal. The pages were filled with ads from major brands, including Ford, Tiffany & Co., British Airways, Volkswagen, ING Direct and HSBC.
"Given that brands are not even fleeing News Corp.'s (British) assets, we find it hard to believe they will pull away from News Corp. in the United States ... unless facts emerge that illustrate far wider wrong-doing at the highest levels," Greenfield wrote on BTIG's website.
Robin Steinberg, an executive vice president for ad agency MediaVest, said so far, she doesn't foresee any clients pulling out of The Wall Street Journal or New York Post, the other major U.S. newspaper owned by News Corp.
"There is a difference between sensationalized journalism and business journalism, and (papers in the U.S. and U.K. are also) separated by a large pond of water," Steinberg said. "The practices overseas are very different than the practices here. To date I'm not concerned with the practices The Wall Street Journal represents. I'm confident in the credibility of their journalistic approach."
In a sign investor worries may be easing, News Corp.'s shares have rallied in the past two days. The stock price still remains down by 12 percent since the scandal's scope widened at the beginning at the month.