Fox's Sky Deal: Regulators Submit Reports, U.K. Government to Decide by June 29

Courtesy of Sky
Sky

Culture secretary Karen Bradley will discuss her initial decision on the deal, or a potential extended review, next week.

U.K. media regulator Ofcom on Tuesday, as planned, submitted the findings of its review of 21st Century Fox's proposed deal to take full control of European pay TV giant Sky — in which the entertainment company already owns a 39 percent stake — to the British government.

U.K. culture secretary Karen Bradley confirmed receipt of the reports. But, as expected in this process, neither Bradley, nor Ofcom, immediately shared any of the key findings or other content of the review, which is set up as a quasi-judicial process, in which the secretary must decide the next step. 

Bradley, who has remained U.K. culture secretary in Prime Minister Theresa May's new government, earlier this year said the transaction would be formally reviewed by Ofcom and the Competition and Markets Authority (CMA), the latter of which focused its work on its jurisdiction in the review process. The regulators originally had until May 16 to prepare their reports, but the deadline was later pushed back to Tuesday due to the recent U.K. election.

The Ofcom review for the culture secretary focused on whether the deal would have harmful effects on editorial standards and U.K. media plurality, meaning whether it would reduce the number of voices in the country's media landscape by concentrating too much power in the hands of key players, given that Rupert Murdoch controls Fox and newspaper company News Corp, which owns British newspapers The Times and The Sun.

Critics have said the Murdochs have too much power as owners of Fox and News Corp, while Fox has highlighted its separation from News Corp a few years ago and the rising influence of online and social media.

Separately, Ofcom, as part of its ongoing mandate, also looked at whether Sky would remain a "fit and proper" TV license holder under the ownership of Fox, which had brought back discussion about the phone-hacking scandal and Fox News' recent legal issues.

Critics have also pointed to lawsuits claiming racial and sexual harassment at Fox News as a sign of weak corporate governance. "21st Century Fox has demonstrated its clear commitment to providing a positive, safe and inclusive workplace free of harassment and discrimination," Fox has said in response. "The company's management has taken prompt and decisive action to address reports of sexual harassment and workplace issues at Fox News."  

Ofcom has said the two reviews overlapped to some degree. It also confirmed Tuesday that it filed its findings on the issues it had to review with the culture secretary, who must now look them over before making a decision on next steps. 

Analysts said that if Ofcom had no regulatory concerns at all, which they called rare and unlikely, it would mean the British government could fully approve the Sky deal fairly quickly.

Analysts also said it was unlikely that Ofcom had found the new owner wouldn't meet the "fit and proper" requirement or called for the deal to be blocked for any other reason.

Most predict that Ofcom likely raised some concerns and possibly suggested conditions tied to an approval of the deal. If that is the case, the culture secretary would now have to decide whether to approve the deal, possibly with conditions, or "undertakings," or whether to refer the deal to the CMA for a more in-depth, so-called phase 2, analysis, which could take several months.

"I will consider these reports in detail before coming to an initial view on whether or not I am minded to refer the merger," Bradley said. "I will aim to make my initial ‘minded to’ decision, publish the CMA and Ofcom public interest reports...and return to parliament to make an oral statement by Thursday 29th June. There will then be an opportunity for representations to be made before I take a final decision."

Bradley explained that she must decide whether the combined company "operates, or may be expected to operate, against the public interest and therefore whether or not to refer for a fuller phase 2 investigation by the CMA."

"We expect a 'middle-case scenario,' which we believe could provide a positive catalyst for Fox," Telsey Group analyst Thomas Eagan wrote in a report early Tuesday before confirmation that the report has been filed. "This 'middle-case' is likely to take the form of deal approval but with a concession: perhaps some kind of independent governance of Sky News. Importantly, we expect the concession will translate to Fox consolidating Sky News."

With Sky's stock trading at a 10 percent discount to the 10.75 pound offer price, "market expectation for deal approval have ebbed," Eagan said. "The June 9th election provided the liberal elements of the U.K. government with more negotiating leverage, lowering deal probability."

Fox CEO James Murdoch has said that he does not expect that "meaningful concessions" will be needed to get approval for the Sky deal. Fox in December agreed to buy the remaining roughly 61 percent stake in Sky for 11.7 billion pounds, or $14.5 billion. The EU previously approved the deal.

Before the split into entertainment company Fox and publishing firm News Corp., what was then known as the combined News Corp. withdrew its previous bid for full control of Sky in 2011 amid the phone-hacking scandal at the firm's U.K. newspaper group.

An Ofcom probe back then concluded that Sky would remain a "fit and proper" U.K. license holder if sold to the conglomerate, but it pointed out failures of corporate governance at what was then News Corp.

Ofcom said Tuesday: "We have today provided our fit and proper assessment to the secretary of state. Ofcom will publish that assessment when the secretary of state announces her ‘minded-to’ decision and publishes the public interest report."

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