Fox's Sky Deal: U.K. Plans In-Depth Review

Karen Bradley - Getty H 2016
Credit: Getty / Dan Kitwood

Culture secretary Karen Bradley cites "Fox’s compliance history" and the fact that the conglomerate set compliance procedures at Fox News "belatedly" as concerns that warrant a closer look.

U.K. culture secretary Karen Bradley said Tuesday that the U.K. government will stick to a recent initial decision that 21st Century Fox's proposed deal to take full control of European pay TV giant Sky needs to get a more in-depth review by Britain's Competition and Markets Authority (CMA), but also added a planned review of the deal's effects on broadcasting standards.

Bradley had in late June said 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, which had analyzed the deal's effects on competition, or media plurality, and commitments to editorial standards. Bradley had back then cited concerns about the transaction's increased influence of members of the Murdoch family trust, which controls Fox and News Corp. She has now confirmed that decision of an extended review. 

But Bradley also said that there would an in-depth review of the company's commitment to broadcasting standards. Ofcom had originally found no concerns on that front, but Bradley said that she had decided to add that second part to the extended review due to new evidence, on which she had consulted with Ofcom. Observers have been saying that lawsuits alleging racial and sexual harassment at Fox News this year could sway Bradley to add that second issue to the extended review. 

On July 20, Bradley had said that while the British parliament would go on its summer recess, she would continue to review submissions on the deal and next steps and make a final decision on how to proceed within weeks. The process ended up taking longer amid various submissions from all sorts of parties.

To seal the deal, Fox had earlier this summer 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. Bradley didn't accept those conditions.

Bradley said her decision to refer the deal for an extended review on both grounds wasn't quite final yet and came despite Ofcom's continued view that a closer look at editorial standards wasn't warranted. Bradley highlighted that she has the discretion to call for further scrutiny, also confirmed by Ofcom, if public interest concerns are not "purely fanciful." She said she has given the parties 10 working days to formally respond, adding: "Following receipt of any representations from the parties I will aim to come to my final decision in relation to both grounds as promptly as I can." 

Analysts and industry insiders expect the final decision will remain unchanged and could come rather quickly as Fox and Sky are expected to want to get the review started sooner rather than later.

Fox said in a statement that it "has engaged with the regulatory process relating to this transaction since the outset and will continue to do so." It continued: "We are surprised that after independent regulatory scrutiny and advice, and over four months to examine the case, the secretary of state is still unable to form an opinion. We urge the secretary of state to take a final decision quickly. We look forward to engaging with the CMA on their in-depth review as soon as possible. Subject to any further delays in the decision-making process, we anticipate that the transaction will close by June 30, 2018."  

The company added: "Ofcom, the expert independent regulator on U.K. broadcasting, undertook a robust and rigorous review of our commitment to the broadcast code, concluding 21 Century Fox and Sky have records of compliance consistent with other comparable license holders ... we do not believe that there are grounds for the secretary of state to change her previous position."

Sky said in a response on Tuesday: "We are disappointed by this further delay and that the secretary of state is now minded to refer the proposed acquisition to the CMA in relation to broadcasting standards despite Ofcom, as the independent broadcast regulator, maintaining its advice that there are not sufficient concerns to justify such a reference. Nevertheless we will continue to engage with the process."

Bradley told the parliament in London on Tuesday about her thoughts on the in-depth review on editorial standards. "The first concern was raised in Ofcom’s public interest report: that Fox did not have adequate compliance procedures in place for the broadcast of Fox News in the U.K. and only took action to improve its approach to compliance after Ofcom expressed concerns," she said. "Ofcom has now confirmed it considers this to raise non-fanciful concerns but which are not sufficiently serious to warrant referral. I consider that these non-fanciful concerns do warrant further consideration. The fact that Fox belatedly established such procedures does not ease my concerns, nor does Fox’s compliance history."

Fox recently ended the U.K. feed of Fox News.  

"Third parties also raised concerns about what they termed the ‘Foxification’ of Fox-owned news outlets internationally," Bradley continued. "On the evidence before me, I am not able to conclude that this raises non-fanciful concerns. However, I consider it important that entities which adopt controversial or partisan approaches to news and current affairs in other jurisdictions should, at the same time, have a genuine commitment to broadcasting standards here. These are matters the CMA may wish to consider."

Turning to the debate about possible corporate governance failures, Bradley said that Ofcom stated in its latest correspondence "that these raise non-fanciful concerns in respect of the broadcasting standards ground. However, it again concludes that these concerns do not warrant a reference. I agree that corporate governance issues at Fox raise non-fanciful concerns, but in my view it would be appropriate for these concerns to be considered further by the CMA."

Bradley summarized: "My proper concern is whether Fox will have a genuine commitment to attaining broadcasting standards objectives. However, I am not confident that weaknesses in Fox’s corporate governance arrangements are incapable of affecting compliance in the broadcasting standards context. I have outstanding non-fanciful concerns about these matters and I am of the view that they should be further considered by the CMA." 

CMA reviews typically take around six months. Fox has to pay Sky shareholders a dividend of 10 pence a share, or about $220 million, if the deal doesn't close by the end of 2017.

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, which was about $14.5 billion at the time, or $15.2 billion now. The European Union and various countries already approved the deal.

But Bradley, who has remained U.K. culture secretary in May's new government, has been seen as being under pressure to not wave the deal through given that the topic of the Murdochs and their political power has been a hotly discussed topic in Britain.

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.

"We think this is more a political issue rather than a real question of Fox's commitment to broadcast standards," Wells Fargo analyst Marci Ryvicker wrote in a first reaction. "While disappointing, we don't think Fox was surprised by today's statement. Nor do we think the Fox News 'issues' are really at play — Ms. Bradley is trying to disentangle herself from shouldering the responsibility of this deal, in our view."