The British government has asked the media regulator to reassess media baron Rupert Murdoch's takeover bid for broadcaster BSkyB in the light of a phone hacking scandal, a move that could provide a basis to block the multi-billion dollar buyout.
The development underlined the political pressure on Prime Minister David Cameron over the revelations, which have caused public outrage over the behavior of some journalists, police and politicians.
The new request to media regulator Ofcom, which is already assessing whether News Corps is a 'fit and proper' holder of a broadcast license, follows a report in the Independent newspaper that lawyers were drawing up plans to block Murdoch's bid to buy out the profitable pay-TV operator BSkyB.
Shares in BSkyB dropped more than seven percent on Monday morning after a similar fall on Friday. News Corp shares fell more than 5 percent in New York last week.
We believe the deal is all but dead, Panmure Gordon analyst Alex DeGroot said.
Murdoch himself has shown no sign of backing away from the deal.
Opposition Labour party leader Ed Miliband said on Sunday he would force parliament to vote this week if Cameron did not take steps to halt News Corp's $14-billion bid for the 61 percent of BSkyB that it does not already own.
A vote in parliament could split the coalition between Cameron's Conservatives and the Liberal Democrats who, traditionally less favored by Murdoch's media, have signaled they could vote with Labour on the issue.
It would also give Labour a chance to cast itself as the champion of a public angered by allegations that News of the World reporters and editors were complicit in illegally hacking the voicemails of a murdered girl, London bombing victims and Britain's war dead in search of stories.
We are working on a plan to suspend the deal while the police investigation is taking place, the Independent quoted a senior government source as saying. A spokesman for the prime minister declined to comment.
Secretary of State for Media Jeremy Hunt wrote to regulator OFCOM asking for a fresh assessment of the BSkyB buyout, which until last week's hacking revelations appeared assured.
Given the well-publicized matters involving the News of the World in the past week...I would be grateful if you could let me know whether you consider that any new information that has come to light causes you to reconsider any part of your previous advice to me including your confidence in the credibility, sustainability of practicalities of the undertakings offered by News Corporation, the letter said.
Murdoch's own Sunday Times reported that a 2007 internal investigation at the News of the World had found evidence that phone hacking was more widespread than the company had admitted and that staff had illegally paid police for information.
Murdoch, 80, flew into London on Sunday to take charge of attempts to save the BSkyB deal and limit the damage to News Corp, the world's largest news conglomerate.
As he was driven into his London headquarters, he held up the final edition of the News of the World, the 168-year-old newspaper he bought in 1969 then closed last week in a bid to stem the crisis.
Christina Camargo-Lima, walking on her way to work past Murdoch's London flat on Monday morning, welcomed the criticism of Murdoch. I think it's time the mogul came down. They just can't control democracy like that.
The paper is best known for its lurid headlines exposing misadventures of the rich, royal and famous. Its last headline said simply Thank You & Goodbye over a montage of some of its most celebrated splashes of the past 168 years.
On Monday, the Daily Mirror newspaper reported, citing an unidentified source, that News of the World journalists had offered to pay a New York police officer to retrieve the private phone records of victims of the September 11, 2001, attacks. [nLDE76A006]
Murdoch dined on Sunday in an upmarket hotel with his British newspaper arm's chief executive Rebekah Brooks, a friend of Cameron's and editor of the News of the World at the time of the alleged phone-hacking, and his son and heir apparent, James. Cameron has since called for her resignation.
The affair has thrown a harsh spotlight on the long-standing ties between British politicians and Murdoch. In particular, it has called into question the judgment of Cameron, who hired former News of the World editor Andy Coulson as his head of communications.
Coulson later resigned, and was arrested on Friday and released on bail after being questioned by police about voicemail hacking and payments to police. Coulson denies any knowledge that hacking was carried out.
Cameron has insisted that the government has no legal power to block the BSkyB deal if it is satisfied that enough media plurality -- competition -- will be maintained. It had already indicated it would accept News Corp's assurances on this count.
FIT AND PROPER
The Independent said the government had latterly hoped the broadcasting regulator Ofcom would stop the deal going through on grounds that News Corp directors were not fit and proper to run BSkyB, but this was unlikely to happen until a possibly lengthy police investigation had been completed.
Instead, it said lawyers in the department of Culture and media were now looking at using competition criteria to block the deal.
That would still be embarrassing for the prime minister, who has ordered a public inquiry and also admitted media barons had too much influence over politicians, but arguably less damaging than a split with his coalition partners.
Blocking the BSkyB deal on grounds of media plurality would also be better for Murdoch than if he and his team were found to be not fit and proper to run the broadcaster, as that could see him lose his existing 39 percent of the company.
(Writing by Jon Hemming; Editing by Jon Boyle)