Murdoch is unlikely to back down because the $12 billion deal is worth a lot to him and News. As my BNET colleague Virginia Heffernan noted on The Live One on Friday, BSkyB is a money machine, profitable and throwing off lots of free cash. That's handy for News, which, although significantly larger, has a lower percentage of profitability and free cash and far higher long-term debt.
Dependent on fish wrap
News already owns roughly 39 percent of BSkyB. Combined, the two companies would have U.K. operations almost twice as large as the BBC, the next biggest media player there, making Murdoch an even more dominant media figure there.
But there are also purely financial reasons that he wants all of BSkyB. Look at this breakout by division, taken from News's most recent public filing (click to enlarge):
Publishing -- read that as newspapers -- has accounted for about 26 percent of News' revenue over the last couple of years, as you can see from these results from the nine-month that ended in March. (News Corp's fiscal year runs July to June.)
But last year, except for the litigation settlement, newspapers created about 20 percent of the company's operating profit. This year? Just under 17 percent. Newspapers are already faltering and in the long run the figures will only trend down, as the industry continues to weaken.
Buy a different kind of printing press
Murdoch needs a replacement, especially with News' $15.5 billion in long-term debt continuing to require service. That's why BSkyB is so attractive. Not only does it continue to add customers on a net basis, but for the same 9 month period, BSkyB had revenue of $7.7 billion and $1.1 billion in pretax profit, representing 14.3 percent of revenue. Cash generated from operations was $1.8 billion.
Compare that to News' performance. On revenue of $24.4 billion, the company had pretax income $2.8 billion, or 11.5 percent. Net cash from operating activities was $2.5 billion, which is less than 40 percent larger, even though revenue is more than triple that of BSkyB.
Furthermore, with capital expenses of $817 million, News has free cash flow of $1.7 billion for the first nine months of the current fiscal year. BSkyB's free cash flow was $937 million. With 12 percent of revenue turning into free cash, versus 7 percent for News, BSkyB is a money printing machine. And that's handy for any business with major interests in declining industries.
Enter the phone-hacking mess
The numbers show why the phone hacking scandal is such a problem for Murdoch. Things aren't looking good to push through the BSkyB acquisition. So far, the smart money has assumed that the deal would still go through, though it might face additional delays.
However, BSkyB's share price continues to fall, and even such conservative politicians as the Culture Secretary and the chairman of the Culture, Media, and Sport Committee are signaling that News and Murdoch should drop the bid. If Murdoch can't ultimately keep the British conservatives in line, he could face a tougher go than many think from other politicians who now see it in their self-interest to find grounds to derail the deal.
- The End of Murdoch: How the Phone Hacking Scandal Could Topple the Press Baron
- How Murdoch Can Survive the Hacking Scandal
- How Rupert Murdoch's Top Tabloid Boss Could End Up in Prison
- Murdoch May Be Down, but He's Far From Out