21st Century Fox’s $14.6 billion bid to acquire the 61% of Sky that it does not own now depends on the remedies, or so-called “undertakings in lieu,” it can offer, analysts say. They could include an agreement by Fox to divest all or part of Sky News, which might satisfy British regulator Ofcom and the Secretary of State’s concerns about media plurality.
Earlier today, UK Culture Secretary Karen Bradley said she was “minded” to refer the bid to the Competition and Markets Authority — largely over Ofcom’s concerns about “the risk of increased influence by members of the Murdoch Family Trust over the UK news agenda and the political process.”
Undertakings already proposed by Fox included maintaining the editorial independence of Sky News and a commitment to maintain Sky-branded news for five years with spending at least at similar levels to now. But Bradley said she was inclined not to accept them.
Enders Analysis’ Alice Enders tells Deadline today that the undertakings in lieu are integral because “the Secretary of State must accept them in order to not refer” a Phase 2 probe to the competition authority. “We don’t expect for this transaction to be approved without some form of UIL/remedy relating to Sky News.”
Steven Cahall at RBC Capital Markets wrote in a note, “The media plurality issue can be dealt with piecemeal including the oversight or a full or partial divestiture of Sky News.”
This is a familiar situation for Rupert Murdoch, who has long coveted a full tie-up with Sky.
In 2010, his company — then News Corp — attempted to acquire what then was known as BSkyB. To pass muster with regulators, he offered to spin off Sky News as an independent entity. A probe ultimately went ahead before the News Of The World phone-hacking scandal tanked the deal entirely.
The parties now have until July 14 to submit representations. “Assuming the Secretary isn’t swayed on the strength of revised undertakings, the deal will be reviewed by the CMA, which will come up with a recommendation of approval, rejection or ‘suggested remedies,’ ” Cahall writes.
Today’s findings are not a major setback to the transaction, analysts say. Enders calls them “completely expected!” and “just part of the process.”
Cahall adds that “while today’s events cast some doubt on the deal due to the CMA referral, we think a major hurdle has simultaneously been crossed.” That’s a reference to Ofcom saying today that if Sky were 100% owned by Fox, it would retain its fit and proper status to hold a broadcast license.
Wells Fargo Securities’ Marci Ryvicker wrote: “All this does is delay the deal for the time being. … This deal is still a very real possibility.”
That’s partly due to the major clearances the deal has already received. The European Commission, the Jersey competition authority and all markets where Sky operates outside the UK including Austria, Germany, Italy and the Republic of Ireland have given a green light to the transaction.
The UK Parliament is in recess from July 20 to September 5, so a decision before the break “seems implausible,” says Enders.
As for what this does to the respective companies’ stock, Cahall says, “We’d expect modest downside to the shares on this news as it arguably pushes out the timing to close and brings up the question about keeping Sky News (which opens the question of price).”
Sky shares rallied today and Cahall believes that’s because the referral to the CMA “provides a path to approval, and UK investors may have been concerned about the ‘fit and proper’ test.”
Jefferies & Co’s John Janedis is maintaining a buy position.
Fox, in a response to today’s findings revealed at the House of Commons, said it will “continue to work constructively with the UK authorities. In the event that the Secretary of State makes a final decision to refer to the CMA, we would expect that the review would take at least 24 weeks. In such an event, the transaction is expected to close by June 30, 2018.”
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