Fox's Sky Deal: A Primer on the In-Depth Review

Courtesy of Sky

What is Britain's CMA — which will conduct it — how will the process work and what do Wall Street analysts expect?

With the U.K. government this week officially referring 21st Century Fox's deal for full control of pay TV giant Sky to Britain's Competition and Markets Authority (CMA) for an in-depth six-month review, the transaction has moved on to a new stage.

But what exactly is the CMA? How does its process work? How long will it take? And what do Wall Street analysts expect from it?

Here is THR's primer, designed to provide a closer look at these and more questions.

What is the CMA?
The Competition and Markets Authority (CMA) is a U.K. government department that is responsible for strengthening business competition and preventing and reducing anti-competitive activities. It has been operating fully since April 2014, when it assumed many of the functions of the previously existing Competition Commission and Office of Fair Trading, which were abolished.

It has been led by David Currie, an economist specializing in regulation who was also the founding chairman of U.K. media regulator Ofcom. 

Currie recently told the government to begin scouting for a replacement for him to ensure the successor has enough time to plan for Britain’s exit from the European Union. A date for his departure has not been announced.

Who will lead the review?
The CMA has picked a panel to handle the extended so-called phase 2 review of the Sky deal to examine how it "would impact media plurality and broadcasting standards in the U.K."

The panel will be led by the CMA's panel chair Anne Lambert, a former deputy director general of Britain's Office of Telecommunications and a former U.K. deputy permanent representative to the EU.

She is joined by three other independent experts chosen from the CMA's panel members who have various backgrounds. Sarah Chambers, a former CEO of the Postal Services Commission and former director of consumer and competition policy for the Department of Business Innovation & Skills, will work on the Sky deal review along with Tim Tutton, a specialist in economic regulation, and John Krumins. The latter has sat on a number of boards of technology, data and services companies and has more than 20 years’ experience in banking, with expertise in mergers and acquisitions, including in media and technology.

What will the process be like?
The CMA review process is targeted to take 24 weeks, with the potential for an eight-week extension. The CMA will get U.K. culture secretary Karen Bradley a final report by the end of week 24 or the end of the extension period. 
The CMA will review the deal's effects on media plurality and U.K. broadcasting standards. Media plurality is defined as "a diversity of independent views about news and current affairs is available from the media," the CMA said. "It also means that one person or group does not have too much influence over public opinion and the political agenda."

Broadcasting standards, meanwhile, are defined in a 2003 law and apply to programs aired on TV and radio. They include "reporting the news with accuracy and impartiality, and ensuring harmful or offensive material is not broadcast on radio and TV," the CMA said.
It also highlighted what it can't do. "The CMA can only look at the issues which have been referred to us by the secretary of state and can’t widen the scope of this inquiry," it said. "We therefore can’t look at competition issues arising from the merger, as these have already been investigated and cleared by the European Commission."

All the CMA’s functions will be handled by the four-person panel. The members' role is to set the overall direction of the inquiry, review the appropriate evidence and analysis and answer the statutory questions on the case. "The CMA identifies third parties to be invited to hearings as soon as possible," it says on its website. That includes competitors and parties affected by the deal. Plus, between March 16 and March 30, there will be a broader invitation for comment.

The CMA will inform the main parties at least 24 hours before the final report is sent to Bradley. Once she gets the CMA report, she will have 30 days to make her decision. "The secretary of state is bound by the CMA’s decision on whether there is a merger situation and its findings on the competition question," according to CMA's site. "But he or she must decide whether there is a problem in relation to the specified public interest issue. Whilst the secretary of state must have regard to the findings in the CMA’s report regarding remedies, he or she can also decide on remedies other than those the CMA has recommended. However, if the secretary of state decides that the public interest issue is not relevant, he or she will send the case back to the CMA to decide how to remedy any competition issue identified."

Negotiations on remedies will start on April 13 at the earliest or June 22 at the latest, according to the published CMA timetable. 

What do Wall Street analysts predict?
Wells Fargo analyst Marci Ryvicker highlighted that the U.K. government referred the deal to the CMA, with Fox deciding not to file comment against that decision. "This wasn't a surprise, although it means Fox owes a sweetener to Sky [share]holders, [a dividend of] $225 million by year-end," she said.

"We believe that the CMA review as to whether Fox's purchase of Sky would reduce media plurality in the U.K. will prove not to be a concern," said Telsey Advisory Group analyst Tom Eagan. "To us, given the massive proliferation of digital and social news and media outlets in the U.K., we are not concerned about Fox passing the media plurality test."

But he also cautioned: "The bigger concern is that additional actions occur related to Fox on-air talent and personnel during the CMA's six-month review process that impact their 'standards' assessment." 

Credit Suisse analyst Omar Sheikh highlighted advice from his firm's external legal counsel, "suggesting the probability of the deal being blocked is higher than most investors think, at 30 percent-40 percent, and that the regulatory process could slip into the third quarter 2018."

But he added: "We think the risk to the deal is lower, and highlight that if it goes through, Fox shareholders will benefit from 15 percent earnings, 10 percent free cash flow accretion in 2018 from consolidating Sky and, if it does not, shareholders should expect to see a sizeable share buyback, possibly up to $5 billion."

What outcome does he expect from the CMA review? "The advice we have received suggests broadcasting standards can be addressed with behavioral remedies (i.e. enhanced compliance and corporate governance procedures)," Sheikh said. "However, media plurality is harder to solve without a structural remedy (i.e. divestiture), and this could be a bigger risk to the transaction if terms of a structural separation of Sky News cannot be agreed."

How likely are concessions? Said the analyst: "Our view is that Fox has every incentive to offer concessions up to full divestiture of Sky News, and that Discovery Communications or Viacom could be interested in the network if it were to be put up for sale next year."