News America Holdings, a US-based subsidiary of Mr Murdoch's News Corporation, is seeking to raise as much as $2bn through an issue of preference shares, convertible at a pre-determined price into shares of BSkyB, Britain's most profitable broadcaster.
The issue would be convertible into as much as 11 per cent of BSkyB, or more than a quarter of Mr Murdoch's 40 per cent stake in the company.
In the first instance, Merrill Lynch, which is placing the issue, is seeking to raise about $1bn, but "greenshoe" provisions mean the total financing could be double that.
The issue, which would carry a dividend of about 5 per cent, will be priced next week. The proceeds are thought to be earmarked for the development of Mr Murdoch's digital television plans in the US and Asia.
Normally, such preference shares would be convertible into shares of the issuing company or its parent.
The stock will be convertible at a premium of about 20 per cent to the price of BSkyB shares at the time of issue, and will be redeemable after five years.
Mr Murdoch's News America Holdings will have the right to offer converting stockholders cash instead of shares, equivalent to the then ruling BSkyB share price.
According to sources familiar with the financing, the move represents a bet by Mr Murdoch that he will be able to afford to retire the shares at their conversion date, possibly within five years, even if the shares soar well above the pre-set conversion price. That way, he would avoid seeing his 40 per cent stake in BSkyB diluted when the shares became convertible.
Shares in BSkyB dropped 42.5p yesterday to close at 636p, as rumours of the share issue began to circulate through the market.
Dealers said the sharp drop was also in reaction to fears that the new cable telephony and TV group, Cable & Wireless Communications, would pose a competitive threat to BSkyB. Some dealers were also concerned that the financing might mean Mr Murdoch was backing away from his commitment to BSkyB.
But it is understood that Mr Murdoch is convinced he can use the funds to finance rapid growth of his other global TV interests, earning a return that is robust enough to more than cover the costs of redeeming the preference stock even if BSkyB shares soar far above the conversion price.
The two most likely targets of the fresh funds are Star-TV, Mr Murdoch's Asian pay-TV service, and ASkyB, the US-based company that is jointly developing a digital satellite service with US partners.
The special convertible shares, developed by Merrill Lynch, have been marketed to other big corporations in need of fresh funds.
According to informed sources, Merrill Lynch has also approached Granada, which is working to reduce the debt pile it amassed following its takeover of Forte, the hotels and restaurants group early this year.
Senior executives of Granada, which has an 11 per cent stake in BSkyB, met Merrill Lynch earlier this year to outline the attractions of raising funds via preference shares convertible into BSkyB stock. Granada is believed to be reviewing ways it can "collateralise" its BSkyB holding, which is worth more pounds 1.1bn.
Analysts said last night that the preference shares could be attractive to institutions which have been underweighted in BSkyB shares. Because only 25 per cent of the company's stock trades freely, there have been acute shortages of available shares for index-linked funds and other City institutions.
Such shortages have been one reason for BSkyB's rapid rise on the stock market.Reuse content