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21st Century Fox’s planned deal for full control of European pay TV giant Sky, in which it already owns a 39 percent stake, will be formally reviewed by British communications regulator Ofcom and the Competition and Markets Authority (CMA), the U.K. government confirmed Thursday.
As widely expected, U.K. culture secretary Karen Bradley made the review official after previously saying she was “minded” to recommend such a move.
Sky unveiled the bid in December and recently formally notified European Union authorities of its 11.7 billion pounds ($14.4 billion) offer for the remaining 61 percent in Sky that it doesn’t already own, kicking off the European regulatory review process. The EU would have allowed News Corp., which later split into News Corp and Fox, to take full control of Sky in 2011, but the company back then pulled its offer amid the phone-hacking scandal.
The EU filing gave Bradley until this week to decide whether Fox’s bid should be subject to a public interest test in Britain. She had at the time said the Ofcom review would focus on such issues as the deal’s effects on U.K. media plurality given that Rupert Murdoch controls Fox and newspaper company News Corp, which owns The Times and The Sun, as well as Sky’s editorial output and standards.
Ofcom will also look at whether Fox is a “fit and proper” owner, which is expected to bring back some discussion about the phone-hacking scandal.
The regulators have until May 16 to prepare their reports. If they have no concerns, Bradley would approve the bid. If they do raise concerns, she would have to decide if the government can accept an “undertaking” from Fox to address the concerns. In 2011, for example, the company suggested spinning off news channel Sky News before the bid was abandoned.
“21st Century Fox looks forward to working with U.K. authorities in their reviews of our proposed transaction to combine with Sky,” Fox said. “We are confident that a thorough review of our track record over 30 years will underscore our commitment to upholding high broadcast standards and will demonstrate that the transaction will not result in there being insufficient plurality in the U.K. The media market has changed dramatically in recent years, as has our business. We believe our proposed £11.7 billion investment will benefit the U.K.’s creative industries. We look forward to continuing to work with all stakeholders and are confident that the transaction will be approved.”
Fox has previously also said it welcomes a thorough review, but in a letter last week argued that some of the initial arguments compiled were “simplistic” and “seriously flawed.”
For example, they included a mention of past conduct of Fox and Fox CEO James Murdoch when he was in charge of News Corp.’s U.K. newspaper group during the phone-hacking scandal. An Ofcom probe in 2012 concluded that Sky was fit and proper to hold a U.K. license and found no evidence of wrongdoing by Murdoch, but it cited the company’s “failures of corporate governance.”
Fox argued that it would be a “clear error” to ignore “the implications of the split between [21st Century Fox] and News Corp,” adding: “The level of scrutiny and controls we have imposed around the world were informed by the lessons learned in 2011.”
Fox also said a report included in the initial research included the “erroneous characterization of News Corp as the ‘largest newspaper provider’ and inaccurate claims that rising online readership has ‘eclipsed’ the dramatic decline in circulation of News Corp titles.”
Fox’s letter also said officials wrongly described shareholdings. The culture secretary’s initial report said a Fox takeover of Sky would increase the Murdoch Family Trust’s stake in Sky from about 15 percent to about 39 percent. “That is not correct: the MFT has no shareholding in Sky,” Fox replied. “The [Trust] and other interests associated with the Murdoch family hold only an indirect interest in Sky, not a shareholding.”
Fox CEO James Murdoch has said he does not expect that “meaningful concessions” will be needed to get approval for the deal. In a recent conference appearance in London, he said Fox’s takeover of Sky would be good news for the U.K. creative industries. “I would argue that there has been no other firm so committed, in deeds, to increasing plurality across the markets we operate in,” Murdoch told the conference. And he added that the separation of Fox from News Corp “is only in its infancy.”
Analysts have said that Fox will highlight the separation of its entertainment and newspaper business in any regulatory review of the Sky deal. After all, before the split into two companies, 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, now part of the post-split News Corp.
“With Sky trading at about an 8.1 percent discount to the takeout price of £10.75, the market expects the deal to be approved without much complication,” said Telsey Group analyst Tom Eagan. “We also believe it will be approved, but the review could take longer than the Street expects.”
He added: “Since Fox’s Sky investment is an unconsolidated asset, the market isn’t currently ascribing its full value to Fox. Alternatively, if Fox were to sell the stake, it likely wouldn’t get full value. As a consequence, we’re in favor of the deal because it 1) reduces Fox’s exposure to advertising volatility due to Sky’s affiliate and subscription fees and 2) should translate to a fuller value for Fox.”
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