Competition probe causes headache for Fox's £11.7bn bid for Sky
Takeover delays prove costly for Murdochs
When 21st Century Fox put £11.7 billion (Dh56.8bn) on the table last December to scoop up affiliated satellite giant Sky, the unspoken belief among investors was: it couldn’t happen again.
The collapse of a previous attempt in 2011 by the Murdoch family-controlled Fox to buy the 61 per cent of Sky it does not already own has left a long shadow.
Despite the launch of an extended regulatory inquiry into the new bid, the view has broadly held that the acquisition will eventually go ahead.
What is less sure is when it can be completed.
Ten months since Fox’s initial offer, spearheaded by Rupert Murdoch and his son James, the conglomerate is still waiting. Although the European Commission gave the deal its blessing back in April, the British government is yet to sign off on it, after the UK’s Competitions and Markets Authority (CMA) launched an investigation last week.
“Closure is unlikely until the second or third quarter of next year,” said Alex DeGroote, media analyst at Cenkos Securities.
“And it wouldn’t surprise me if it gets put back even further.
“It’s like waiting for Godot, dragging on and on. There’s no end in sight really. Management at both Fox and Sky sound fed up.”
The process has been dragged out by the British government’s decision to launch an in-depth investigation into the deal, amid submissions warning that the Murdoch family could exercise a dominant role in the country’s media market.
An earlier report, by UK media regulator Ofcom, said the Murdochs – who control The Sun, The Times and The Sunday Times newspapers – would have “increased influence” over the UK’s media should they assume full control of Sky.
Culture secretary Karen Bradley felt that the Ofcom report created “sufficient uncertainty” about the deal to warrant sending it to the competition watchdog for a wide-ranging, six-month review.
Last week, the CMA set out the scope for its investigation.
Among the questions it will ask is whether the Murdoch family’s ability to control editorial decisions at Sky News would change following the takeover.
The review will also look at the Murdoch family’s ability to “influence the political agenda” after the deal, and whether the transaction could affect the number of media outlets in Britain, as well as the “range of viewpoints”.
“Once the investigation is complete we will report back to Karen Bradley for her to make a final decision,” said CMA panel chair Anne Lambert.
The scrutiny does, in some ways, seem warranted. After all, the transaction would bring together two of the most powerful broadcasters in the world – which could provide a platform from which to potentially influence public and political opinion.
For 21st Century Fox, the appeal of buying up Sky – the jewel of European broadcasting – is easy to see. Consolidating Sky would provide a lift to earnings and give Fox control of a growing company that is a natural strategic fit with the rest of its portfolio. It would also help to expand Fox’s capabilities in the direct-to-consumer space.
“The strategic rationale for this combination is clear,” Fox declared in a stock exchange statement last December announcing the deal. “It creates a global leader in content creation and distribution, enhances our sports and entertainment scale, and gives us unique and leading direct-to-consumer capabilities and technologies.”
But the decision to hold a full-scale examination into the deal means a looming cost for 21st Century Fox. The bidder must now make a payment to the Sky shareholders if the deal is not completed by the end of this year.
“Fox has to pay a 10p-per-share special dividend to every Sky shareholder if the deal doesn’t complete by the end of this year – which it won’t. That’s £170 million we’re talking about,” Mr DeGroote said. “So the delay is costing them a lot of money.”
One obstacle for 21st Century Fox completing its takeover bid was removed last week, when James Murdoch was re-elected as Sky chairman at the annual general meeting.
Murdoch Jr told the meeting that he expected the regulatory process to conclude by the middle of 2018.
“On both sides, 21st Century Fox and Sky, both are engaged constructively with the regulatory authorities, and I am confident we will get to a conclusion by the middle of next year,” he said.
Advocates of the tie-up warned Ms Bradley that any further delay could cast doubt over Britain’s claim to be “open for business” post-Brexit. But the culture secretary has stuck to her guns, insisting that fears over media plurality and broadcasting standards must be assuaged before the buyout is given the green light.
Many in the market are also critical of the government’s cautious handling of the bid, which raised new risks over the transaction.
“Call it a conspiracy theory if you like, but I think the whole deal is entirely tied up with politics,” Mr DeGroote said. “If there was a change of government – from the Conservatives to the Labour party – between now and the end of the review, I think the outcome might be very different.”
Will the deal go through? The jury is still out, but Mr DeGroote believes the odds of it being approved are around 70/30. “It’s not a slam dunk, but it is probable,” he said. “Everywhere else in Europe has signed it off. It would be a bit weird if the UK didn’t follow suit.”
Alice Enders, a media analyst at Enders Analysis, also believes it will be approved, albeit with conditions.
“Opponents say Mr Murdoch already exercises too much control. How can we hand him more?” she said.
“But there is an obvious remedy here. It’s called a buffer between the Murdoch family trust and Sky News … including creating a fully independent editorial board, and strict editorial guidelines. Indeed, that’s what 21st Century Fox offered to Ofcom already.”
As for criticism about the level of government scrutiny over the deal, Ms Enders said: “I think [the scrutiny] is absolutely fair enough, that’s the whole purpose of having a regime.
“What we hope is that we have safeguards in the system, that in the media merger regime work.
“No one is afraid of it. What they’re afraid of is the reverse – that there is no scrutiny, that there are no criteria, and that it becomes a free-for-all, where a deal could be set aside simply because someone decides they don’t like Mr Murdoch. That’s not reason enough to turn down this transaction.”
Updated: October 18, 2017 07:33 PM