S&P Prepares To Savage News Corp

Standard & Poor’s put News Corp (NYSE: NWS) on credit watch just as Rupert Murdoch prepares to testify before Parliament. His board may have signaled support for his role as CEO, but S&P does not care about that. It sees little but risk in the company’s future, and that means its cost to borrow may well rise.

The agency wrote that “it placed all ratings, including its ‘BBB+’ corporate credit rating, on New York-based News Corp. on CreditWatch with negative implications.” S&P’s credit analyst Michael Altberg said, “We see the risk that, if evidence arises sufficient to bring a criminal charge against the company or any current or former employee of the company, then prosecuting authorities in the U.S. could proceed with those charges.”

The S&P action should be more important to Wall St. than whether any individual senior officer at News Corp is arrested or resigns.

News Corp reported third quarter net income of $639 million for the period that ended March 30. This is $0.24 per share. The figures are impressive until investors consider that News Corp has $15.455 billion in debt. News Corp has $11.784 billion in cash, but hundreds of millions of dollars will probably go to legal costs for the defense against hacking and bribery charges. The firm also faces penalties and settlement fees. The probe could move to the U.S., where there is concern that News Corp’s news divisions may have hacked the phones of the families of 9/11 victims.

Investors have focused on the rapid drop in News Corp’s shares to $13.46 from a 52-week high of $19.08. A number of analysts believe the shares could move below $10. The stock price is not what pays the debt service at News Corp. The higher borrowing costs that would come from an S&P downgrade would cripple News Corp’s ability to pay a debt service cost, which is now a quarter of a billion a quarter.

Douglas A. McIntyre