Shares in British Sky Broadcasting Group PLC rallied hard after Rupert Murdoch's News Corp. pulled its takeover bid for the company in the face of vociferous opposition in the U.K. parliament.
BSkyB shares closed 2 percent higher at 705 pence ($11.35), after trading around 680 pence when News Corp. said it was pulling its bid.
In the immediate aftermath of the statement, the shares tanked to a low of 665 pence, but that knee-jerk sell-off proved short-lived as investors had already concluded that the bid was doomed given the toxic political environment.
Analysts said News Corp.'s decision will, counter-intuitively, help BSkyB after a week-long battering following the disclosure of widespread phone hacking at the News of the World.
Now that the bid has been pulled, speculators like hedge funds — who were looking for windfalls from the prospect of a higher News Corp. offer — are pulling out. At the same time, however, new investors are looking to buy up what has become relatively cheap stock for a company that is highly profitable.
"We see good quality long term buyers coming in — Barclays Capital are recommending buying the shares today with a 820 pence share price target, and many investment banks think it's good value here," said Louise Cooper, markets analyst at BGC Partners.
News Corp.'s move to drop its bid was the latest development in a phone hacking and bribery scandal at the News of the World, which the company closed last Sunday after 168 years. The furor mounted after revelations that the tabloid was hacking the phones of potentially thousands of people, including a murder victim.
Even the traditionally partisan British politicians were planning to band together later Wednesday in a vote urging News Corp. to pull its bid. Earlier, Prime Minister David Cameron confirmed there would be a judge-led inquiry into the scandal.
Given that backdrop, it's hardly surprising that the Nasdaq-listed company decided the game was up.
"We believed that the proposed acquisition of BSkyB by News Corporation would benefit both companies but it has become clear that it is too difficult to progress in this climate," said Chase Carey, News Corp.'s deputy chairman.
Investors seemed relieved by the news, and pushed shares in News Corp. up 2.6 percent higher to $16.50.
Though the failure to clinch the remaining 61 percent stake in BSkyB probably marks the biggest corporate failure in Murdoch's career, he and his family are unlikely to give up their hopes of taking full control of what is now Britain's biggest media company.
Carey said as much: "News Corporation remains a committed long-term shareholder in BSkyB."
Charles Stanley's Hart said News Corp. may well be back to resurrect its BSkyB ambitions once the police investigation in the phone hacking scandal has been completed.
In the meantime, he said he wouldn't be surprised to see News Corp. continue to invest in the company, as it generates "tremendous" amounts of cash and is forecast to be debt-free by the end of the 2013 financial year.
Although News Corp. may have taken itself out of the direct firing line by dropping its BSkyB bid, it will still have to prove that it is a "fit and proper" organization to control a commercial media license in the U.K.
Ed Richards, chief executive of Ofcom, the U.K.'s media regulator told British lawmakers that it is required "to continue on an ongoing basis to be satisfied that any person (which will include controlling directors and shareholders) holding a broadcasting licence remains fit and proper to hold those licences."
In his letter to John Whittingdale, the chairman of the culture, media and sport committee of lawmakers, Richards said the regulator is "monitoring the situation closely and in particular the investigations by the relevant authorities into alleged unlawful activities in regard to any evidence of any relevant conduct."
If it flunks that test, News Corp. could face pressure to get rid of its 39 percent stake entirely, even though Ofcom does not have the legal right to force it to sell the stake.
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