By Kate Holton and Georgina Prodhan
LONDON, April 13 (Reuters) - A British parliamentary report into a phone hacking scandal may lead eventually to News Corp being forced into cutting or selling its stake in the highly profitable pay-TV firm BSkyB, having already dropped its bid to buy it outright last year.
Parliament's culture committee is widely expected to criticise News Corp in its long-awaited report, raising the possibility that the British broadcast watchdog Ofcom will take action against Rupert Murdoch's media conglomerate.
News Corp lies at the centre of a long-running scandal over phone and computer hacking, in which journalists intercepted the voicemails of celebrities and crime victims, and now faces allegations that police officers were also paid for information that was used in newspaper reports.
Ofcom, which has to ensure that directors of TV companies are "fit and proper" to hold a broadcast licence, is already conducting its own investigation into News Corp and BSkyB's directors, including Murdoch's youngest son James, who resigned as BSkyB chairman last week but remains on the board.
Meanwhile, Murdoch's influential British newspapers, which were subdued for a time at the height of the scandal, have gone on the offensive against Conservative Prime Minister David Camerson and his coalition government.
"From a political standpoint, Rupert Murdoch's attacks could have really burned his bridges with the government," said Ian Whittaker, a media analyst at London investment bank Liberum Capital, who follows BSkyB.
"From the point of view of News Corp's opponents, if you wanted to lance this whole boil once and for all with News Corp and its stake in Sky, this would be a very good opportunity to do that," he said.
"The more this investigation goes on, and the more that is disclosed, the greater the risks for News Corp that it could be forced to sell its stake," he said. "It's not probable at the moment but increasingly possible."
Culture committee member Tom Watson, a dogged critic of the Murdochs, said Ofcom was awaiting the report. "Ofcom have already written to the committee at the start of this inquiry to say that as they seek to apply the 'fit and proper' test, that they will be looking at the report," he told Reuters.
The lawmakers may blame the culture at News Corp, following the scandal at the News of the World tabloid, which the group closed down last July. However, they are debating how far they can assign blame on individuals without prejudicing any future criminal trials.
After summoning father and son to parliament for a grilling last summer, the culture select committee could publish its findings and recommendations by the end of April. The government must respond within two months.
The committee has already accused News Corp of "collective amnesia" in a previous report after a host of company executives said they couldn't remember who had done what and when.
The final report may encourage Ofcom, which has kept a deceptively low profile so far, to take a fresh look at News Corp's 39 percent stake in BSkyB. Ofcom already reminded the public of its duty to ensure directors and owners of TV companies are "fit and proper" during News Corp's ultimately aborted bid to buy the rest of BSkyB in 2011.
News Corp also owns around 40 percent of the British national newspaper market, which has helped 81-year-old Murdoch senior to wield great influence for decades.
Tackling Murdoch's level of media ownership would, critics say, reduce his influence, which they also blame for an initial reluctance by the police and some politicians to investigate the hacking allegations thoroughly.
While the "fit and proper" test is vague and rarely applied, it has rattled investors in BSkyB. Ofcom played a role in forcing BSkyB to sell down a stake in commercial TV rival ITV in 2010, even though it was below a legal threshold.
Analysts now believe News Corp is more likely to be forced to reduce its stake in BSkyB than to be allowed to increase it, far less to pursue a full takeover again in the near future.
One executive who has worked alongside James Murdoch told Reuters that no one had realised last year quite how important the Ofcom investigation would become. "That's no longer the case," the executive said, requesting anonymity.
"Ofcom are likely to look very closely at what the select committee says," said Becket McGrath, a competition law partner at Edwards Wildman.
"While Ofcom taking away Sky's licence seems unlikely, if they find a wider problem concerning the corporate culture at News Corp, this may necessitate a stronger 'cordon sanitaire' between the companies to protect Sky from any fallout."
A separate judicial inquiry into press standards, which is due to hear evidence from Rupert and possibly James Murdoch later this month, is also likely to examine the report as it draws up new recommendations to regulate the press.
Both News Corp and BSkyB declined comment for this article.
The cross-party committee has taken months to produce its findings, which had been expected before Christmas, highlighting the difficulty that members from the Conservative and opposition Labour parties are having in agreeing their verdict.
The committee reopened its inquiry last year to find out whether it had been lied to in its original investigation.
Feeling that an important element of British democracy had been cast aside by a company that did not take the inquiry seriously, this time around the 11 members interviewed all News Corp's main executives from Rupert Murdoch down.
They will now decide whether James Murdoch, who stood down at BSkyB in the hope of shielding the company from the scandal, showed incompetence or dishonesty in his dealings.
The government is not obliged to follow the report's recommendations, but political analysts say the committee's power has already been demonstrated through its ability to summon and interrogate high-profile witnesses in hearings that have been broadcast around the world.
Two people familiar with workings of the committee said members wanting to criticise James Murdoch appeared to have the upper hand over those who accepted he did not realise the scale of the problem at the News of the World.
The Labour politicians have traditionally been more hostile to News Corp, but the committee, which also has one member from the junior coalition Liberal Democrat party, is not split strictly along party lines.
"If the Labour people all turn up on the day and can keep the Liberal Democrat MP on side, they should have the edge," one of the people familiar with the committee's workings said. "But they are unlikely to want to roll over the Conservatives completely; the committee tradition prefers consensus."
Watson told Reuters there might be some areas of contention, but declined to say what they were. "It's difficult to say, even now, but my sense is most of the report will be published with the unanimous support of all members. There might be one or two points where we disagree."
The committee may be hamstrung by the fact that some of the executives it questioned have already been arrested, meaning it may have to tone down its language. Britain's attorney general is due to brief the committee on Monday, and is expected to advise its members on how to avoid prejudicing any future trial.
One way to do that, lawyers and academics say, would be to avoid specific criticism of individuals and instead target the company as a whole.
"In the longer term, the health of the media sector may benefit more if the committee focuses on the company and the structural issues that were discovered rather than individuals," said Jonathan Tonge, head of politics at Liverpool University.
Watson said caution was one reason why the report's publication has been repeatedly delayed. "The reason it's taking so long is we've been very, very cautious. We test the meaning of words within phrases within sentences within paragraphs."
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