BSkyB will hand out 1 billion pounds ($1.6 billion) to placate investors who lost out when a phone-hacking and police corruption scandal forced News Corp to drop its bid for the satellite broadcaster.
BSkyB, whose board on Thursday voted unanimously to keep the embattled James Murdoch as its chairman, will return 750 million pounds to investors with a share buy-back and a further 253 million via a 20 percent boost to the final dividend.
News Corp agreed to take part in the buyback to prevent its stake from creeping above its current 39 percent, BSkyB said on Friday. Any increase would have been politically contentious while the phone-hacking scandal hangs over the company.
We view the share buyback announcement as positive, particularly given News Corp have agreed to participate, one of BSkyB's 10 largest shareholders told Reuters.
The 750 million pounds quantum is sensible and allows a balanced approach between returning cash to shareholders while maintaining financial flexibility to pursue growth opportunities, the fund manager said.
BSkyB also released full-year results that beat expectations for sales and profits, though a slowdown in customer additions showed the impact of economic weakness and perhaps the fact that management attention had been focused on the failed bid.
Shares in BSykB initially rose slightly on the news but closed down 0.6 percent at 712 pence, broadly in line with the wider market.
Ordinarily, one might expect a buyback of this size, equivalent to 7 pct of share capital, to lead to both decent upgrades and a decent share price reaction, said Alex DeGroote, media analyst at brokerage Panmure Gordon.
Our sense is that Sky faces a challenging 2012 in terms of its core business. The company gave an impressive performance in 2010/11, but the management that delivered it probably didn't expect the plc to remain a going concern in FY12, he said.
As well as being a consolation prize for investors and for News Corp -- which will make 390 million pounds instead of the hoped-for consolidation of BSkyB's substantial cash flows -- the move may signal a shift at BSkyB if growth begins to slow.
While there's still concern about growth, they may be more open to share buybacks, and that potentially helps News Corp as well, said Ian Whittaker, media analyst at Liberum Capital.
Shares in BSkyB have fallen by more than 15 percent since the News Corp bid premium evaporated and the long-simmering phone-hacking case erupted into a national outrage this month.
Allegations of hacking at a title since closed by News International, News Corp's British newspapers unit, in particular reports that journalists accessed the voicemails of murder victims, have triggered a judicial inquiry and calls from some politicians to cap Murdoch's media ownership.
There have also been allegations of payments to police officers for information and overly close links between News International personnel and senior police officers. Two of Britain's most senior officers have already handed in their resignations.
This makes any renewed approach for BSkyB, whose current market value is $20 billion, a distant prospect.
STRONG CASH FLOW
BSkyB's appeal to News Corp was highlighted as the broadcaster reported a 51 percent jump in adjusted free cash flow to 869 million pounds on the back of a 19 percent increase in core profit to 1.4 billion.
The broadcaster, which offers broadband and telephone services in addition to its core premium sports, movies and drama pay-TV offerings, increased revenue by 16 percent to 6.6 billion pounds, beating analysts' forecasts.
Given the tough environment, we're pleased with our growth this quarter, BSkyB Chief Executive Jeremy Darroch told journalists on a conference call.
In a sign that its subscribers may be feeling the pinch as the British economy struggles, the company said average revenue per user (ARPU) dipped to 539 pounds per year at the end of the fourth quarter from a rate of 544 pounds in the third.
BSkyB said a technical issue related to less frequent publishing of a magazine was largely to blame, but its number of TV customers rose by just 40,000, well below the expected 60,000, taking the total TV customer base to 10.2 million.
Rival Virgin Media, which sells TV and telephone services alongside Britain's fastest broadband, this week said it had lost 36,000 cable customers but extracted higher spending from the ones who remained.
BSkyB has frozen subscription prices until next year, and Darroch said he expected the consumer environment to remain difficult. Britain's economy barely grew between April and June, according to figures released this week.
Nonetheless, Darroch said BSkyB remained focused on organic growth, and the company said it had won rights to broadcast Formula One racing in a partnership deal with Britain's public service broadcaster, the BBC.
The dividend lifts BSkyB's payout for the full year by 20 percent to 23.28p per share, creating a total dividend pot of 405 million pounds of which News Corp, as 39 percent shareholder in BSkyB, will get about 160 million.
News Corp has seen its stock fall more than 10 percent on fears of reputational damage to the wider group, wiping billions of dollars off its market value and shaking Rupert Murdoch's grip on the media group.
As well as derailing the planned buyout of BSkyB, the scandal forced Murdoch Snr to shut the 168-year-old News of the World tabloid at the heart of the scandal and rocked the British political establishment.
Asked on Friday why BSkyB's board had decided to keep James Murdoch as chairman while investigations by police, a top judge and a parliamentary committee continue, Darroch said: It's not for me or for Sky to preach as to the outcome of those.
James Murdoch, who is head of News Corp's international operations, and is based in Wapping, the HQ of the UK newspaper operations, has already appeared before the British Parliament's Culture, Media and Sport Committee to give evidence on the phone hacking scandal.
On Friday the committee said he would probably be recalled to clarify details following claims his evidence was mistaken.
(Additional reporting by Sinead Cruise; Editing by Chris Wickham and Will Waterman)