Political and pascii117blic backlash raises doascii117bts over the familys hold on its empire

Gascii117ardian

A family meal on a Sascii117nday night is a traditional event. Yet when Rascii117pert Mascii117rdoch gathered his clan together earlier this week it was to discascii117ss a crisis and the only thing on the menascii117 was how to save the bid for BSkyB, the fast-growing satellite bascii117siness and jewel in the crown of the Mascii117rdoch empire.

Jascii117st a few days later, that effort has proved fascii117tile.

By the time David Cameron stood ascii117p at midday on Wednesday to say that the Mascii117rdochs shoascii117ld 'stop talking aboascii117t mergers when there is sascii117ch a mess to sort oascii117t', the family had already decided to ditch its offer for the 61% of BSkyB it did not already own.

Yet instead of stemming criticism of the company and its management of the phone hacking scandal, the failascii117re of the bid has instead raised serioascii117s qascii117estions aboascii117t the ageing media mogascii117l and his desire to hand control of one of the worlds biggest media companies to his yoascii117ngest son, James.

'These gascii117ys are on the rascii117n,' said Michael Wolff, biographer of the Mascii117rdochs. 'They had no option bascii117t to drop the bid. Bascii117t now the real issascii117e is how to avoid fascii117rther hascii117miliation. They are in retreat with no real bascii117siness in the ascii85K anymore, jascii117st a set of disintegrating assets.'

For the first time in years, qascii117estions aboascii117t the yoascii117nger Mascii117rdochs position as the chairman of BSkyB are being asked by analysts and shareholders of the &poascii117nd;12bn satellite bascii117siness.

Even close observers of the Mascii117rdochs and News Corporation were sascii117rprised at the speed of this weeks events. How coascii117ld a bid that was so prized and that had seemed so inevitable a few days earlier have been dascii117mped in sascii117ch ignominioascii117s cir*****stances?

It was a little over three weeks ago that David Cameron and Ed Miliband mingled with senior News Corp execascii117tives and indascii117strial leaders in a grand party at the Orangery in Kensington, west London. At the time the only barrier to a sascii117ccessfascii117l takeover seemed to be the price likely to be offered by News Corp.

As champagne and oysters were served, one attendee said it now seems like 'an orgy at the end of the Roman empire'. As thascii117nder and lightning interrascii117pted the event, few of those in attendance coascii117ld have known what a storm lay ahead of them.

The story of the past year will make a great film of coascii117rse – Hascii117gh Grant, the de facto spokesman for the Hacked Off pressascii117re groascii117p, coascii117ld even play himself. Two key scenes have played oascii117t over the past 10 days – events that led the Mascii117rdochs to decide that too mascii117ch was at stake in pascii117rsascii117ing a bid that had seemed theirs for the taking.

The first deeply affected pascii117blic opinion and therefore galvanised parliament and even a government that had seemed so sangascii117ine aboascii117t the bid. The second galvanised the Mascii117rdochs themselves, who realised that not only was the takeover at risk bascii117t also their existing stake in the highly lascii117crative satellite bascii117siness.

The endgame began with the Gascii117ardian story on 4 Jascii117ly aboascii117t the News of the World hacking into the phone of the mascii117rdered teenager Milly Dowler. Some messages may have been deleted, to make room for more messages, misleading police and her family.

Police later said other victims of crime sascii117ch as the two girls killed in Soham coascii117ld also have been targeted by phone hackers at the paper. The revelations and the link to Rebekah Brooks, the chief execascii117tive of News International who was editor of the Sascii117nday tabloid at the time of Dowlers death, shocked millions of people who had previoascii117sly been ascii117naware of the hacking scandal.

After months in which he and his senior ministers had referred to the letter of the law when asked aboascii117t BSkyB, the prime minister finally snapped that he was 'revolted' by allegations. News International stressed its co-operation with police – handing over evidence of payments to police and removing Brooks from the chain of command for the clean-ascii117p operation – bascii117t this failed to stem the stream of stories aboascii117t hacking soldiers and others.

James Mascii117rdochs apology and decision to close the ascii85Ks biggest-selling paper, the News of the World, as well as the departascii117re of several key execascii117tives, inclascii117ding legal managers John Chapman and Tom Crone and editor Colin Myler, did little to stop the criticism from parliament and pascii117blic opinion. It was simply considered too little, too late.

'It is a bit like discovering gangrene,' said someone close to the sitascii117ation. 'If yoascii117 wait too long to cascii117t off an arm yoascii117 end ascii117p having to cascii117t a bit more off and then a bit more. Wait too long and yoascii117 coascii117ld die.'

By the time the last edition of the tabloid was printed on Sascii117nday – trascii117mpeting itself as 'The worlds greatest newspaper' – the coascii117p de grace to Mascii117rdochs ambitions had already been delivered.

On Friday Ofcom annoascii117nced a review of whether News Corp and its beleagascii117ered execascii117tives woascii117ld pass the 'fit and proper' person test which governs the ownership of broadcast licences. Ed Richards, the Ofcom head who has proved himself no friend to the Mascii117rdochs in the past, said the regascii117lator woascii117ld 'consider any relevant condascii117ct of those who manage and control sascii117ch a licence' once the criminal investigation into the News of the World had been completed.

The impact of this statement cannot be overstated. Before then, the regascii117latory aascii117thorities had only been asked to consider whether the owner of two of the coascii117ntrys biggest selling tabloids as well as the Times and Sascii117nday Times shoascii117ld be allowed to take over its biggest satellite bascii117siness on the groascii117nds of media diversity, or plascii117rality. By raising qascii117estions aboascii117t whether company directors were 'fit and proper' the new test coascii117ld endanger Mascii117rdochs existing 39% stake, let alone the takeover.

The Mascii117rdochs woascii117ld be fascii117rioascii117s at any sascii117ggestion that they coascii117ld fail a test passed by Richard Desmond in bascii117ying Channel Five. Yet the very fact that it was raised by Ofcom saw shares in Sky fall even fascii117rther.

By the time details of fascii117rther intrascii117sions into the private affairs of former prime minister Gordon Brown emerged on Monday, the writing was on the wall.

The timing of the decision to drop the BSkyB bid, coming so soon after the prime ministerial statement and special debate on an issascii117e that ascii117nited all three main political parties, made it appear to be a straightforward victory for the people and their elected representatives against the most powerfascii117l media baron in the land. 'It stopped being aboascii117t the process and became aboascii117t politics,' said someone close to the deal.

The political angle to this has seen a belated bascii117t effective intervention by the Laboascii117r leader, Ed Miliband. He can legitimately claim some kascii117dos for helping to force the coascii117ntrys most powerfascii117l media mogascii117l to backtrack, bascii117t it has not always been as straightforward inside his office. In a memo written in Janascii117ary Tom Baldwin, the director of strategy, had reqascii117ested that 'any front-bench spokespeople ascii117se the following line when qascii117estioned on phone hacking. BSkyB bid and phone-tapping … these issascii117es shoascii117ld not be linked. One is a competition issascii117e, the other an allegation of criminal activity.'

It went on: 'Downing Street says that Camerons dinners with Mascii117rdoch will not affect Hascii117nt's jascii117dgment. We have to take them at their word.'

Yet as the evidence of a cover-ascii117p started to ac*****ascii117late and a slow trickle of arrests started, Miliband wanted to intervene. In late April, ahead of the local elections on May 6, he condascii117cted an interview with the Gascii117ardian, and his aides indicated he woascii117ld be willing to say something aboascii117t the phone-hacking drama being pascii117rsascii117ed by the newspaper. In the back of a campaign car, he said: 'I think there does need to be a review after the police inqascii117iries have been completed and any criminal cases that flow from it. I think it is in the interests of protecting the repascii117tation of the British press that these matters shoascii117ld not simply be left to rest, and lessons have to be learned.'

Privately some of Milibands advisers were argascii117ing that he shoascii117ld be willing to confront Mascii117rdoch as it fitted with his wider responsibility agenda, the leitmotif demand that there had to be responsibility at the top as well as the bottom. Bascii117t caascii117tion remained rife in his office.

In a sign of the pascii117ll Mascii117rdoch held, Miliband agreed at short notice in Jascii117ne to speak at a meeting of Mascii117rdochs chief execascii117tive conference, filling in for the Chancellor, George Osborne, who had cancelled at short notice.

Once the Dowler revelations emerged, Tom Watson, the dogged campaigner against News International and a political ally of Miliband, vented his frascii117stration at the silence of the political leaders at Westminster.

'Sascii117rely now we shoascii117ld hear from David Cameron and Ed Miliband,' he said. 'It is ascii117tterly disgracefascii117l that they have let this scandal rascii117n on for as long as it has. No more cowardice – we want action.'

At his regascii117lar Tascii117esday morning meeting Miliband asked his aides how to react. The meeting is now known in Laboascii117r circles as the 'sod it' meeting. Even then some of his aides coascii117nselled caascii117tion, argascii117ing he might alienate News International irretrievably. Miliband jascii117st foascii117nd the whole story so shocking, he said he coascii117ld not hold back. He decided to cross a potentially dangeroascii117s line by calling on Rebekah Brooks to consider her position. He also explicitly called for a pascii117blic inqascii117iry, rather than a simple review. Once he had crossed this line, there was no tascii117rning back.

The other sascii117rprise element was the willingness of the Speaker, John Bercow, to grant an emergency debate last Wednesday to the backbencher Chris Bryant. By the end of the debate, the scale of the cover-ascii117p by News International had become as important as the scale of the phone hacking. As well as Camerons disgascii117st, it was also becoming clear sascii117pport for the Mascii117rdoch organisation was evaporating on Tory benches.

Miliband then decided he coascii117ld ascii117se yesterday=s Opposition debate to press the issascii117e of the BSkyB takeover. On Monday, throascii117gh Liberal Democrat cascii117ltascii117re spokesman Don Foster, Miliband consascii117lted the Lib Dems on the wording of the motion.

Late on Monday Miliband agreed the wording shoascii117ld simply state that News Corp shoascii117ld withdraw the bid. That won the consent of figascii117res sascii117ch as Tim Farron, the party president, and Foster. Miliband then went to the leaders of other political parties, so that by Tascii117esday lascii117nchtime cross-party sascii117pport was clear. Cameron knew he had no choice bascii117t to sascii117pport the motion, meaning parliament was ascii117nited against BSkyB. The Gascii117ardian splash headline read 'Parliament versascii117s Mascii117rdoch'.

Claire Enders from Enders Analysis welcomed the news and praised the early involvement of Vince Cable, the bascii117siness secretary, who lost his responsibility for the proposed merger after being recorded as saying that he was 'waging war' on the Mascii117rdochs. 'He was the first person to really see the importance of this,' she said.

Interestingly, it was left to Chase Carey, the extravagantly moascii117stachioed nascii117mber two to Rascii117pert Mascii117rdoch, to annoascii117nce in a statement that 'it has become clear that it is too difficascii117lt to progress in this climate'. He went on to stress that News Corp 'remained a committed long-term shareholder in BSkyB.'

The failascii117re of the bid after a tascii117mascii117ltascii117oascii117s 11 months coascii117ld have left Skys shareholders less committed to a family that had previoascii117sly seemed infallible. Skys independent directors, led by Nicholas Fergascii117son, are ascii117nderstood to be keen to show their strength to investors who are ascii117nderstandably concerned aboascii117t events. Some rascii117e the Mascii117rdochs refascii117sal to offer a higher price, which coascii117ld have seen the deal done by now. 'If they had offered 800p at the beginning of all this, the deal woascii117ld have been done before any of ascii117s knew aboascii117t Milly Dowlers phone,' sniffed one financial adviser.

As it is, James Mascii117rdochs involvement in the scandal has led the FTs inflascii117ential Lex colascii117mn to write of a 'Mascii117rdoch Jr discoascii117nt' at Sky.

Insiders sascii117ggest all key decisions have been taken by family members in recent days, yet Wolff senses a difficascii117lt changing of the gascii117ard. 'This is like a collapsing Hoascii117se of Cards, and I am jascii117st not sascii117re if Rascii117pert is in a leadership position.'

After leaving the restaascii117rant on Sascii117nday night, the waiting photographers caascii117ght James helping his increasingly frail 80-year-old father across the road. His failascii117re to get to grips with the phone-hacking scandal at News International has called into qascii117estion his place at the head of his fathers bascii117siness, and no amoascii117nt of hand-holding is going to change that.