Fox's Sky Deal Review: What Is Likely to Happen Next

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From left: Fox's Lachlan, Rupert and James Murdoch

Comments from the conglomerate and its critics are due Friday as the U.K. culture secretary continues to weigh next steps.

21st Century Fox and others are due to submit by Friday noon ET comments on the U.K. government's recent suggestion to request a more in-depth competition review of the entertainment conglomerate's planned deal to take full control of European pay TV giant Sky.  

While their so-called "representations" won't be made public immediately, the government will review them before it makes a final decision on next steps as early as next week.

Several U.K. analysts said they expect that Fox will not offer additional concessions beyond ones made so far, with several analysts saying that this will likely lead the U.K. government to next week formally call for the extended review by the Competition & Markets Authority (CMA) that it has previously suggested.

"I think they will just accept a likely review," said Liberum Capital analyst Ian Whittaker about Fox.

Enders Analysis analyst Alice Enders similarly suggested in a report that Fox would likely wait for what the CMA decides in its six-month review and discuss concessions then. "We are not sure 21st Century Fox has the appetite to lodge [an undertakings] offer [now], given the company’s incentive to obtain an expeditious process to clearance of the merger," she wrote in a recent report.

"21st Century Fox may have an incentive to short-circuit the [undertakings] track and accept [a] CMA phase 2 [review]," which would likely lead to negotiations about concessions down the line, she said.

Enders and another industry observer highlighted that Fox may feel good about its position in an extended review given that U.K. communications Ofcom in its recent Sky deal review raised competition concerns, but no concerns about editorial standards. It even sounded positive on concessions proposed by Fox, even though it suggested the company could take them further. 

In contrast, some U.S. analysts have predicted Fox could make more concessions now to push the deal through. "We still think Fox [will] provide the concessions to get this done before it gets punted to the Competition & Markets Authority (CMA)," Wells Fargo analyst Marci Ryvicker wrote in a recent report. 

And Telsey Advisory Group analyst Tom Eagan recently wrote: "We expect Fox will offer another concession related to Sky News in an effort to mitigate regulator concerns."

But British observers believe Fox is ready and willing to go through the extended review after recently saying that could push the close of the Sky deal to mid-2018. They cite the weakened position of the conservative British government of Theresa May after the recent election, saying that makes U.K. culture secretary Karen Bradley more likely to call for a more in-depth, a so-called "phase 2," review by the CMA to get added help for a final decision.

Enders said an extended review would help with "depoliticizing the deal as much as possible."

The Guardian, without citing specific sources, late on Thursday reported that Fox would indeed not offer expanded concessions. Fox’s stock was down 2.6 percent at $27.91 as of 12:45 p.m. ET, with Sky's stock also lower on the news.

One risk of the CMA review is that Prime Minister Theresa May’s party was weakened in the recent election and needs to rely on a smaller party for a majority in parliament. If the government decided to throw in the towel before the deal review is completed and there was a new election, Fox could possibly see the Labour Party, members of which have been outspoken against the Sky deal, in power, with the then culture secretary making the final decision on the deal.

A CMA review would also make it likely that the deal would only be completed in 2018. If it doesn't wrap by the end of this year, Fox would have to pay Sky shareholders a dividend of 10 pence a share, or about $220 million.

Bradley must next make a decision whether to formally request a more in-depth CMA review as she recently suggested or, possibly, take other next steps.

Industry watchers are expecting she will unveil next steps next week before the British parliament goes on its summer break after its July 20 workday ends. Bradley had told parliament last month: "I am acutely aware of the parliamentary timetable. I hope that the date of [July 14] will enable me to have enough time before the House rises to come back to the House with any further updates."

With no sign of expanded concessions from Fox, the most likely decision is that she will stick to her plan to refer the deal to CMA for its review.

Fox had previously offered some concessions, which were 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.

U.K. communications regulator Ofcom’s recently stated view was "that these remedies would mitigate the — serious — media plurality public interest concerns," Bradley had said late last month. "They also suggested that the remedies could be further strengthened." That is why she said she was "minded to" not accept the proposed concessions and refer the deal for an extended competition review.

One observer suggested that Fox could, if needed after the CMA review, possibly offer a longer-term commitment to Sky-branded news, say for seven or 10 years, to get approval for the Sky deal.

Ofcom had analyzed the deal's effects on competition, or media plurality, and commitments to editorial standards, as well as whether Sky, fully owned by Fox, would remain a "fit and proper" owner of broadcasting licenses. It raised concern in the area of competition, citing concerns that the transaction would increase the influence of members of the Murdoch family trust, which controls Fox and The Sun and The Times owner News Corp.

Fox in its submission on Bradley's "minded to" comments is expected to stay its course and reiterate why it believes the Sky deal should pass. 

Meanwhile, critics of the Sky deal and the Murdochs are expected to again speak out against the takeover in the submissions due Friday and against Bradley's plan not to launch an extended review of the company's commitment to editorial standards. 

For example, U.K. campaign group Avaaz, which has opposed the deal, was expected to submit comments on Bradley’s “minded to” position by Friday. The group staged a protest outside the British parliament the day that Bradley announced her plans and said that it would consider legal options. “Karen Bradley should make this decision based on what’s best for the British people, not Rupert Murdoch,” Alex Wilks, campaign director at Avaaz, said that day. “If the government greenlights the deal based on more empty Murdoch promises, we’ll look hard at a legal challenge to protect our democracy."

And politicians from the opposition Labour Party recently warned the conservative government of Theresa May "not to do a grubby deal with the Murdochs."

The Culture Department on its website said Fox and Sky could comment on her plans by the Friday deadline, while inviting other parties to submit their "views in relation to the secretary of state’s minded-to decision not to refer [the deal for an extended review] on the grounds of genuine commitment to broadcasting standards." It added: "We would welcome new or substantive evidence on the question of commitment to broadcasting standards and on Ofcom’s assessment of these matters."

Fox, Sky and the culture secretary didn't comment.