LONDON The Murdoch family's grip on Britain's BSkyB is coming under increased scrutiny, with some shareholders concerned that an imminent report from lawmakers will increase the pressure on James Murdoch to give up his chairmanship of the satellite broadcaster.
The report from the parliamentary committee investigating the phone hacking scandal has been delayed but is now expected before Easter.
It will come hot on the heels of news that UK broadcast regulator Ofcom has intensified its investigation into whether BSkyB's links with Murdoch and News Corp make it fit to hold a broadcasting licence.
The Ofcom investigation, which is open ended, is examining mounting evidence of wrongdoing at Rupert Murdoch's British newspapers and whether it impinges on BSkyB as a "fit and proper" holder of a licence.
It will increase the scrutiny on James Murdoch's position at the satellite company, and could eventually lead to News Corp selling down its 39.1 percent stake in a company it wanted to buy outright last summer.
One UK-based top 40 BSkyB institutional shareholder, who asked not to be named, said it was worried that the focus on James Murdoch could distract BSkyB's management, and it could set up an unwanted argument with Ofcom in what is a strongly regulated industry.
"It is a problem if you are being figure-headed by someone who does not have a good relationship with the regulator," the shareholder told Reuters on Friday.
"That is a business risk. That's the concern we've had."
James Murdoch has remained chairman of BSkyB, despite stepping down as executive chairman of News International, News Corp's British newspaper arm, last month.
Pharmaceutical firm GlaxoSmithKline has also said James Murdoch will step down from its board.
Claire Enders at Ender Analysis said Ofcom had been obliged to monitor BSkyB for the last seven months or so, and in that time the extent of the allegations had escalated.
"The committee report has real impact as a form of political judgement of the management of News International," Enders said.
The committee's findings, which one member has said should be published before Easter, are likely to further dent Murdoch's reputation and raise questions as to whether he is a liability to BSkyB rather than an asset.
Damian Collins, a lawmaker who sits on the committee, said it was making "good progress" on the report but he would not confirm when it might be published.
"There has been a lot more to go through than normally would be for a select committee and there will be a great deal of interest in every dot and comma," he told Reuters.
"I am sure that Ofcom will be interested to see what we find in our report, we are working on that report now, and hope that will be helpful for whatever course of action they decide to take."
Murdoch relocated to New York at the beginning of the year to look after News Corp's international TV interests, although the move was viewed by many as an attempt to distant himself from the phone-hacking furore.
He was not present when Rupert Murdoch unveiled his new Sunday edition of the Sun tabloid last month. His brother Lachlan was conspicuous at his father's side on a newsroom tour ahead of the launch.
COULD MURDOCH THROW IN THE TOWEL?
Any criticism from the lawmakers' report, coming on top of the wider probe by Ofcom, the police investigation into phone hacking and the judicial review of the newspaper industry, will increase pressure on the board of BSkyB to remove James Murdoch.
The board has backed James Murdoch since the scandal blew up last summer, pointing to his record in leading the company both as chief executive and chairman.
Analyst Will Smith at Jefferies said Murdoch had done a good job in chairing the group, which remained strategically important for News Corp.
"He's led the company as CEO through a fairly strong growth period, so he's got the background, the experience, and he knows the market," he said.
"The risk is the Murdoch name, which a lot of people are viewing quite negatively right now, so he's vulnerable due to family connections and the fallout from the scandal last summer."
A UK shareholder at a large fund manager, speaking on condition of anonymity, agreed that Murdoch was vulnerable.
"It's probably likely that James Murdoch will have to end up leaving, which will be a bloody great shame," the shareholder said.
"What may happen is there will be enough mud thrown around by Ofcom, but not enough to force News Corp to sell its stake down, but Murdoch could say almost as a trade-off 'I'm out'."
UBS analyst Polo Tang said that any forced sale of the News Corp stake could result in a takeover of BSkyB.
"Rather than look at any potential stake sale by News Corp as an overhang, we believe any forced sale of such a strategic stake could potentially flush out a bidder for the whole company and therefore lead to hopes of a takeover," he said in a note.
He added, however, that the Ofcom probe was not likely to reach any conclusions until the criminal investigation into phone hacking by News International was more advanced, which could take some time.
Selling any of the stake will be a major blow to Murdoch, who last year was prepared to pay 8.3 billion pounds to take full control of the group before bowing to political pressure to withdraw the bid.
Shares in BSkyB were 0.9 percent higher at 7 pounds by 1604 GMT.
Both BSkyB and News Corp declined to comment.
(Additional reporting By Avril Ormsby; Editing by Chris Wickham)