UPDATE 1-BSkyB investors eye cash after deal collapse

Wed Jul 13, 2011 1:33pm EDT

* Buyback seen likely use for BSkyB's spare cash

* Shares close up 2 pct, but down 20 pct in July (Adds reaction, quotes)

LONDON, July 13 (Reuters) - Long-term investors in BSkyB will expect the pay-TV operator to return capital to increase the company's value after a phone-hacking scandal forced year-long suitor News Corp to abandon its bid.

Rupert Murdoch's News Corp tried to buy the 61 percent of BSkyB it did not already own to tap in to the millions of pounds the company generates, but withdrew its bid earlier on Wednesday as police investigated allegations that one of its UK newspapers hacked the voicemails of thousands of people and paid police officers for information.

BSkyB's major shareholders will now expect to see some of that cash themselves, especially as the company has relatively little debt.

"Sky is throwing off around half a billion pounds worth of free cash flow per year," Mark Kelly, special situations analyst at Olivetree Securities, told Reuters. "And its net debt is being quickly paid down.

"Chief Executive Jeremy Darroch has also done an excellent job throughout this situation. The delivery by the company has remained excellent, and he's also fought a very subtle and persuasive battle for shareholders, in the way you would expect a real bid defence to be run.

"Shareholders really appreciated it, and there's a good relationship between shareholders and management."

Darroch said on Wednesday he remained confident about the company and its future as a standalone business.

"We are delivering on our clear, consistent strategy and are building a larger, more profitable business for the long term," Chief Executive Jeremy Darroch said in a statement. "We remain very confident in the broadly based growth opportunity for BSkyB."

Top 10 shareholder Aegon Asset Management said they had been positive on the Sky stock prior to the bid and would remain so.

"BSkyB is in the early stage of a cashflow harvesting phase as a period of heavy investment drops away and the returns in terms of strong revenue, profit and cashflow growth continues," Stephen Adams, head of UK equities at the investor, told Reuters.

"Given how quickly the company has been deleveraging, I would expect BSkyB to look at returning cash through either a special dividend or share buybacks over the next 12 months.

"On a price/earnings ratio of around 14.5 times to June 2012, the stock looks very attractive," he said.

News Corp had originally offered 700 pence per share for BSkyB and the independent directors had asked for 800 pence. The two sides then agreed they would put the price negotiations on hold until they secured regulatory approval.

Shares in BSkyB closed up 2 percent at 674 pence after an initial fall on the News Corp announcement, but are still down 20 percent in July as the phone-hacking scandal put the bid in doubt.

Analysts said the shares would likely recover further as investors looked more closely at the fundamentals of the business, though there would still be some element of uncertainty over whether News Corp would return at a later date.

The media conglomerate could even be forced to sell down its stake in BskyB if the media regulator finds that News Corp is no longer a fit and proper owner of media titles as a result of the scandal. (Reporting by Kate Holton and Sinead Cruise; Editing by Will Waterman)