What the U.K. Election Means for Fox's Sky Deal

Courtesy of Sky

Analysts discuss how a Theresa May minority government would affect the U.K. regulatory review of the proposed transaction.

The U.K. election has weakened the position of current prime minister Theresa May, whose Conservative Party lost its majority in Parliament. But May is looking to form a minority government, with the support from a smaller party, which would give her a narrow majority in parliamentary votes.

Analysts on Friday started discussing the impact this will have on 21st Century Fox's more than $14 billion bid for full ownership of Sky. British regulators have been reviewing the deal that would boost Fox's Sky holding from 39 percent to 100 percent.

Communications industry regulator Ofcom in its review is focusing 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. It is scheduled to report to whoever is U.K. secretary of culture on June 20.

The review by Ofcom and one by the Competition and Markets Authority (CMA) were originally scheduled to wrap by May 16, but were extended from until June 20 due to the election.

If the regulators have no concerns about the deal, the culture secretary would simply approve the bid. If they do raise issues, the government would have to decide if it wants to accept potential "undertakings," or remedies, from Fox to address the concerns. (In 2011, for example, the company's predecessor News Corp. suggested spinning off news channel Sky News before it abandoned the bid amid the phone-hacking scandal.) Or the government could ask the CMA for a more in-depth review that analysts say could last more than six months. 

Macquarie Capital analyst Guy Peddy expects that to be the case. "The election result in our view means the review of the deal will be pushed to the CMA as politicians look to defer the decision whilst the political landscape hardens," he wrote in a report on Friday.‌

But RBC Capital Markets analysts wrote: "Assuming a Conservative secretary [of culture], and a benign Ofcom report, we still expect approval."

Analysts also highlight that the Ofcom process is independent from politics and quasi-judicial.

But without many clear-cut political answers on Friday, Sky's stock dropped as much as 3.3 percent in early trading amid questions over whether May would really continue to govern before settling after she announced the plans for the minority government. Late in the day, the stock was only down 0.6 percent.

Some observers say there could be delays to the government's decision on whether to approve or further review the Sky deal once it gets the regulators' reports. After all, the May cabinet "might be reshuffled and a new [culture] minister is named and has to take up a large number of dossiers at the same time, of which one is the 21st Century Fox/Sky deal," Alice Enders, head of research at Enders Analysis, tells THR.

She predicts a "brief delay" in that case, explaining: "[There is] always a risk of delay in the formation of a new government." 

Analysts have said that if the Labour Party ended up in government, it would be more likely to block the Sky deal. Senior Labour politicians have often criticized the influence of Fox and News Corp chairman Rupert Murdoch and his family

"If Labour gets in, then [there is] a good chance the deal gets blocked," Liberum Capital analyst Ian Whittaker told THR before the election. "We believe Labour would be more opposed to a Fox/Sky deal than the Conservative government," echoed Berenberg analyst Sarah Simon.

"There is significant opposition from Tom Watson, deputy leader [of Labour], and [Labour politician and former party leader] Ed Miliband, so the political calculus will shift to a less friendly scenario," explained Enders.

May, who took over the government after last summer's referendum in favor of Britain's exit from the European Union, had in April called for a snap election in the hopes she could broaden her popular mandate for the Brexit negotiations with the EU.

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