| LONDON/NEW YORK
LONDON/NEW YORK News Corp may have to raise its BSkyB bid as much as 20 percent to take full control of the British satellite TV company as its 7-month-old offer gets tied down in a phone-hacking scandal that may undermine the deal.
The deal, expected to sharply reduce the company's exposure to the weak newspaper business, will likely overshadow the company's quarterly earnings, which are due after the market closes on Wednesday in New York.
Journalists at News of the World were found to have hacked into the voice mails of celebrities and politicians. The scandal has caused an aide to British Prime Minister David Cameron to resign.
It also forced Murdoch to cancel his planned trip to Davos for the World Economic Forum to deal with the matter personally.
Investors now worry it could hurt the BSkyB bid, which is now being considered by the British government.
Last June, News Corp Chairman Rupert Murdoch bid 7.8 billion pounds ($11.6 billion), or 700 pence a share bid, for the 61 percent of BSkyB his company doesn't already own. At today's exchange rates, the bid is worth $12.5 billion.
The BSkyB board turned down News Corp's bid asking for an offer of at least 800p at the time.
Many analysts have nudged up their fair value price estimates for BSkyB following their strong first half results, which showed adjusted operating profit up 26 percent due to strong demand for broadband.
They believe Murdoch could end up having to pay between 830p to 850p a share or nearly $2 billion higher than News Corp's original bid, based on today's currency exchange rates.
"Operationally this deal would improve News Corp's profit margins and on a valuation basis it improves the free cash flow yield significantly," said Collins Stewart analyst Thomas Eagan.
Shares in BSkyB are up over 29 percent since the close of market the day before News Corp made its bid, compared with a 14 percent rise in both the FTSE 100 Index and the European Media Index.
Britain has given News Corp a final chance to avoid a prolonged investigation into the buyout and will consider options suggested by the company to reduce competitive concerns before the deal is handed over to regulators.
Larry Haverty, a fund manager for Gabelli Global Multimedia Trust, believes the deal will be completed, albeit with contingencies and a higher price tag.
"They may have to give up Sky News," said Haverty, who owns News Corp shares. "Adjusting for what Sky News is worth, I do think they're going to up their bid."
The unusual move by Britain has been interpreted in a number of ways, with some analysts believing the chances of the deal progressing without a full six-month referral are now higher as it shows the government is open to a solution.
"It's excruciating but most of us think it'll be done by June," Gabelli's Haverty said. "It's in 'deal jail' not knowing whether they're going to get BSkyB or not."
Despite vocal opposition in Britain, there is widespread belief among lawyers and analysts that the deal will ultimately be approved by the Competition Commission, probably with remedies attached.
Meanwhile, BSkyB has continued to sign up customers at a heady rate and sell them an increasing number of products, following a round of capital spending and cost-saving projects that are paying off.
RBS analyst Paul Gooden said Sky's performance warranted a higher bid. "In terms of fair value I think it's about 8.40 pounds and that would still leave quite a lot of synergies on the table for News Corp."
David Stewart, the head of one of BSkyB's biggest shareholders Odey Asset Management told Reuters that Murdoch would have to do much better than the current offer.
"We would prefer not to sell, at any price," Stewart said. "He (Murdoch) can afford whatever he wants. It all depends -- because if it goes to an 8-month inquiry, I should think all bets are off the table."
The global media conglomerate is expected to benefit from an improving advertising market particularly at its broadcast and cable operations in its fiscal second quarter. That will likely be offset by its Hollywood business, where revenue is expected to decline from a year ago when "Avatar" broke box office records.
Analysts on average expect News Corp to post profit of 28 cents a share on revenue of $8.71 billion according to Thomson Reuters I/B/E/S compared with year-earlier profit of 22 cents on revenue of $8.68 billion.
(Reporting by Yinka Adegoke in New York and Kate Holton in London; additional reporting by Sinead Cruise in London)