Fox’s Sky Deal: U.K. Government Calls for More In-Depth Competition Review

Courtesy of Sky

The culture secretary cites competition, but not editorial concerns, while Ofcom finds Sky will remain a "fit and proper" U.K. license holder despite "significant corporate failures" at Fox News.

U.K. culture secretary Karen Bradley on Thursday unveiled her initial decision on 21st Century Fox's proposed deal to take full control of European pay TV giant Sky, saying that it should be further reviewed by Britain's Competition and Markets Authority (CMA).

She unveiled early Thursday that she was "minded" to take the approach of an extended analysis on competition grounds after reviewing a report from U.K. media regulator Ofcom that her department received on June 20, which analyzed the deal's effects on competition, or media plurality, and commitments to editorial standards.

Bradley cited concerns about the transaction's increased influence of members of the Murdoch family trust, which controls Fox and News Corp.

She said in a speech in the British parliament that Fox had proposed conditions, or "undertakings," focused on maintaining the editorial independence of Sky News by establishing a separate editorial board, with a majority of independent members, that would oversee the appointment of the head of Sky News and any changes to Sky News editorial guidelines. They also included a commitment to maintaining Sky-branded news for five years with spending "at least" similar to current levels.

"Ofcom’s view was that these remedies would mitigate the — serious — media plurality public interest concerns," Bradley said. "They also suggested that the remedies could be further strengthened." She said she was therefore "minded" not to approve the deal with the proposed conditions.

Bradley, however, also said there would be no extended review of the company's commitment to broadcasting standards, saying Ofcom found no concerns.

"[That] second question concerns whether after the merger the relevant media enterprises would have a genuine commitment to broadcasting standards. Ofcom is unequivocal," Bradley told parliament. "It concludes, 'In light of Fox’s and Sky’s broadcast compliance records and taking account of our separate assessment of whether Sky remains fit and proper to hold broadcast licenses following the transaction, we do not consider that the merged entity would lack a genuine commitment to the attainment of broadcasting standards'."

She said she had also asked Ofcom to consider "the effect of any failure of corporate governance on this public interest consideration," and Ofcom did this in the context of its separate assessment of whether a Fox-owned Sky would remain "fit and proper" to hold broadcast licenses. "It concluded that behaviors alleged at Fox News in the U.S. amount to ‘significant corporate failures.’ However, these did not in its view demonstrate that the merged company would lack a genuine commitment to broadcasting standards." That was a reference to lawsuits alleging racial and sexual harassment at Fox News.

The companies and other parties can now comment on Bradley's decision until July 14, and the secretary said she would then make a final decision on next steps. 

"We are pleased that she [Bradley] minded not to refer the proposed transaction to the CMA in respect of the commitment to broadcasting standards," Fox said in a statement. "While we welcome the Secretary of State’s decision on broadcasting standards, we are disappointed that she does not accept Ofcom’s recommendation stated in its report that 'the proposed undertakings offered by Fox to maintain the editorial independence of Sky News mitigate the media plurality concerns.' Separately, 21st Century Fox is pleased that Ofcom recognizes that Sky, under full 21 Century Fox ownership, would remain a fit and proper holder of broadcast licenses."

The conglomerate said it "will now make representations to the Secretary of State regarding her provisional decision and Ofcom’s report and will continue to work constructively with the U.K. authorities. In the event that the Secretary of State makes a final decision to refer to the CMA, we would expect that the review would take at least 24 weeks. In such an event, the transaction is expected to close by June 30, 2018." 

Sky, meanwhile, said in a statement: "Sky will continue to engage with the process as the Secretary of State reaches her final decision. In the meantime, Sky welcomes today's announcement of Ofcom's decision that Sky would continue to be a fit and proper holder of its broadcast licenses under full ownership of 21 Century Fox and will continue to operate its business as usual."

Analysts said the good news about Thursday's update was that no final decision has been taken and that only the competition concerns may lead to an extended review. And several said the deal could close if Fox offers more concessions.

"Ultimately, we expect Fox to propose new remedies with the goal of appeasing Bradley and avoiding a CMA review," Jefferies analyst John Janedis wrote in a report. And Wells Fargo's Marci Ryvicker said: "With a final OK from Ms. Bradley pending further concessions from Fox, it appears the door is open for this deal to close — Fox just has to walk through it."

Shortly after Bradley's announcement, U.K. media regulator Ofcom on Thursday also published its separate but overlapping report filed with the British government last week that concluded that Sky would remain a "fit and proper" U.K. broadcasting license holder if 21st Century Fox's proposed deal goes through.

"It seems clear that there were significant failings of the corporate culture at Fox News. Fox’s response to the claims has been mixed," Ofcom wrote. "Some allegations were handled swiftly. But Fox was slower to deal with Bill O’Reilly, its star anchor. In order to have a concern about fitness and properness we would need to see evidence of misconduct in the parent company Fox. However, we have no clear evidence that senior executives at Fox were aware of misconduct before it was escalated to them."

Fox already owns a 39 percent stake in Sky, which operates in the U.K., Ireland, Germany, Austria and Italy. The conglomerate in December agreed to buy the remaining roughly 61 percent stake in Sky for 11.7 billion pounds, which was about $14.5 billion at the time, or $15.2 billion now. The European Union and other countries already approved the deal.

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 June 20 due to the recent U.K. election.

Critics have said the Murdochs have too much power as owners of Fox and News Corp, which owns British newspapers The Times and The Sun, while Fox has highlighted the separation of its entertainment businesses from newspaper company News Corp a few years ago and the rising influence of online and social media.

In its separate but overlapping review of whether Sky would remain a "fit and proper" TV license holder, Ofcom had to weigh various topics. Critics have pointed to the Fox News lawsuits 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 previously 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."  

Bradley had explained last week that her decision would be 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 two investigation by the CMA."

"All this does is delay the deal for the time being," Wells Fargo analyst Marci Ryvicker said about Thursday's update. "Recall that the European Commission gave the takeover deal a green light this past April given no major competition concerns. Irish authorities also gave their approval earlier this week. So, this deal is still a very real possibility."

Fox CEO James Murdoch has said that he does not expect that "meaningful concessions" will be needed to get approval for the Sky deal. But analysts said Fox could over more concessions now to seal the deal.

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