LONDON Shares in Rupert Murdoch's bid-target BSkyB BSY.L slumped on Friday as the phone hacking scandal engulfing the media mogul's empire pushed the controversial deal into uncharted waters.
Shares in BSkyB dropped suddenly on Friday, by almost 6 percent, when the government said it would take into consideration the closure of the tabloid at the heart of the hacking scandal and the impact this would have on media plurality, or "media voices."
"One thing that investors don't like is uncertainty," a senior competition lawyer involved in the deal told Reuters.
"It's all very unpredictable and we're outside the realm now of legal process. Clearly the law is still the law and everyone should remember that but it's hard to predict what will happen now because the situation is changing on an hourly basis."
Shares in the U.S.-listed News Corp were down 4.4 percent in early trading as investors there weighed the changing landscape for the deal.
Buffeted by a series of accusations over the conduct of his journalists, Murdoch is now under even more pressure as he fights to secure his $14 billion bid to buy out the 61 percent of the successful pay-TV group he does not already own.
Analysts and competition lawyers say the government has little room to maneuver over the deal as News Corp has already agreed to a string of undertakings to protect media plurality -- the grounds on which the government can examine it.
However it is likely to push its final decision back by some months in a bid to let the crisis die down. It could also ask for even more undertakings.
After the sudden closure of Britain's biggest-selling Sunday newspaper, the government warned that its final decision could "take some time" as it assesses the change in the market.
It has also received over 160,000 submissions to a final consultation on the deal which will need to be processed, while the deputy leader of Britain's Liberal Democrat ruling coalition party said he would challenge the fitness of News Corp to hold a broadcasting license.
"The Secretary of State ... will consider all relevant factors including whether the announcement regarding the News of the World's closure has any impact on the question of media plurality," the media department said in a statement.
Peel Hunt analyst Patrick Yau said he still believed the deal would go through but that uncertainty was growing.
"I don't think this deal is dead," he told Reuters.
"We've seen the share price come off as people are nervous but if you think about where the stock price came from before the bid, at 570 pence, there's a long way between where we are now and that level."
Shares in BSkyB have lost 10 percent this week, slumping to a more than four month low to below 770 pence from around 850 pence on Monday. Trading volumes on Friday were at more than seven times the 90-day daily average.
Two special situations analysts attributed the fall in the BSkyB share price to forced selling by hedge funds.
"The stock has fallen to a level where people have to get out, it's a technical and not a fundamental thing," said one of the analysts. "I personally don't think that Murdoch will walk away from the deal," he said, adding that the cash flow BSkyB has is too important for News Corp.
The British government has always said the phone hacking scandal and BSkyB takeover are not linked from a legal standpoint but it will be loath to approve the deal at a time when politicians from all sides are taking to the parliament floor to denounce Murdoch and his company.
"My reading is that the government is trying to find a way to pull back from making a decision," the competition lawyer said. "It's under so much pressure. But they're exposed by the process, they can't change the scope of the review."
Panmure Gordon analyst Alex DeGroote warned that the speed at which events were unfolding meant investors were "into totally uncharted territory."
He cut his price target on BSkyB shares to 730 pence from 750 pence on what he judged to be a higher risk that the proposed deal would collapse.
Prime Minister David Cameron, himself under fire for being too close to News Corp executives, again stressed that the government would follow proper legal procedures.
Competition lawyer Simon Holmes from SJ Berwin said the government was being very careful to argue the two cases were not linked.
"I think the decision will be pushed back but I wouldn't say forever," he told Reuters. "The government will want to move on. I think we will get a decision on BSkyB in a couple of months.
"If it was left to fester then the reason for the delay could be challenged."
(Additional reporting by Paul Sandle and Georgina Prodhan; editing by Sophie Walker and Chris Wickham)