Why Sky Stock Is on the Rise Despite Call for Extended U.K. Review of Fox Deal

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The British secretary of culture said she is "minded" to order a more in-depth probe of the proposed transaction's effects on media plurality.

The stock of European pay TV giant Sky rose in Thursday trading after the U.K. government announced its initial decision regarding the planned takeover of full control of the company by 21st Century Fox.

U.K. culture secretary Karen Bradley said she was "minded" to ask for a more in-depth review of the deal on competition grounds but said there would be no extended review of its effects on editorial standards. U.K. communications regulator Ofcom ruled that Sky would remain a "fit and proper" TV license holder under Fox's ownership.

Competition reviews by the Competition and Markets Authority (CMA) take up to six months.

As of 12:45 p.m. London time, Sky shares were up 3.3 percent at 9.88 pounds, or $12.71, still well below Fox's takeover price of 10.75 pounds. Before the government announcement, the stock had been up more than 1 percent at 9.705 pounds. Fox's stock also traded slightly higher in early trading.

"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, highlighting the positive news in Thursday's decision.

RBC Capital Markets analyst Steven Cahall had said in a research report ahead of the decision that the outcome of an extended deal review was hard to predict. "While not a deal killer, we think this would cut the deal’s probability to 50/50," he wrote.

On Thursday he said in a first reaction: "Sky shares have rallied 3 percent, we think because the referral to the CMA provides a path to approval, and U.K. investors may have been concerned about the 'fit and proper' test. This test is arguably binary and somewhat subjective, whereas the media plurality issue can be dealt with piecemeal, including the oversight of a full or partial divestiture of Sky News."

He concluded: "So while today's events cast some doubt on the deal due to the CMA referral, we think a major hurdle has simultaneously been crossed via 'fit and proper.'"

"All this does is delay the deal for the time being," Wells Fargo analyst Marci Ryvicker said. "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."

Others also said that the government likely wants an extended probe to not seem like it was waving through the deal without regard to concerns expressed by critics. 

Analysts on Thursday argued that the government's decision was better than an extended review on both competition and broadcasting standards. They also said that the extended review could push a potential deal close into 2018, in which case Fox would have to make a special dividend payment to Sky shareholders, giving investors another reason to bid up Sky shares. With the U.K. parliament's summer break starting after July 20, some even said a final government decision may only come in September. 

The company had said in December in unveiling the deal: "21st Century Fox currently anticipates that the acquisition will complete before the end of 2017." It continued, "Under the terms of the acquisition, if the effective date has not occurred on or before 31 December 2017, Sky shareholders shall be entitled to receive a special dividend of 10 pence per Sky share, payable in 2018." Analysts have said that the dividend payout would cost Fox more than 170 million pounds, or $220 million.

Fox, which already owns a 39 percent stake in Sky, had as of Tuesday midday received regulatory clearance from most countries that had reviewed the deal and the EU. The U.K. culture secretary on Thursday unveiled the final piece of the regulatory puzzle. 

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