July 21, 2017    7 minute read

Fox’s Sky Takeover Bid: Doomed to Fall Apart?

Fox Cannot Jump?    July 21, 2017    7 minute read

Fox’s Sky Takeover Bid: Doomed to Fall Apart?

On December 9, 2016, Twenty-First Century Fox Inc. made a preliminary deal with Sky Plc to acquire full control of the company (Fox already held a 39% stake in Sky). The 61% stake not already owned was valued at £11.2bn ($14.1bn), corresponding to an offer of £10.75 per share. On the day of the preliminary deal, Fox’s share price decreased by 2%, while Sky’s share price saw a 27% increase.

The deal draws from the negotiations that began in 2010 between the two companies (at that time, Twenty-First Century Fox was still operating under the name of News Corporation, as the spin-off took place in 2013), but on that occasion the phone-hacking scandal involving News of the World and other British newspapers interrupted the deal.

Synergies and Advantages

First, the post-Brexit collapse in sterling makes the acquisition less expensive than it was before June 2016; further, Sky did not perform well in the UK stock market during the first half of 2016, lowering the company’s value.

The acquisition represents for Fox an opportunity to compete with rivals like Netflix, whose efforts focus on streaming services: Sky has an established online streaming service (SkyGO), which could serve as a springboard to catch young customers; in light of the growth of new players within the online streaming sub-sector (such as Facebook and Amazon), investing on Sky and leveraging its digital platform seems even more reasonable.

Considering the big picture of the two companies, their businesses seem a good match for consolidation: Fox built its image as a producer of global content, while Sky currently offers a direct service to its European customers (to this extent, the wide range of services offered to its customers, both before and after purchase, allows to develop a high customer value).

With the inflow of resources deriving from the new shareholders, Sky can also work toward a reinforcement of its sports and entertainment business in the UK, as it is currently facing growing pressure (both from online and traditional competitors).

On a long-term basis, Fox might also think about expanding the of Sky’s services in other countries, maintaining the current offering or modifying it according to the different customers, however this will have to face pressure by the regulators (if the two entities operates within the same market, this might make difficult for TV audience to recognize them and therefore can represent a threat for media plurality).

Cost Reductions

A possible cost reduction can arise from the increased negotiating power: the process to obtain broadcasting rights (sports in particular) may be easier for a big player. On the side of Fox, the acquisition represents a great chance to diversify: Sky’s revenues come from a solid base of European pay TV subscribers (22.4m customers in 2017), and this would change the revenue structure of Fox, currently focused on US cable advertising.

Further, the diversification will be also in terms of markets: the European pay TV market is structurally different from the US market, and it is also less penetrated into households, therefore carrying a decent growth potential on a long-term basis.

Considering the big picture of the product offering, the integration of Sky’s TV services with Fox’s content can lead to the creation of a high-quality product, characterised by the prioritisation of content by Fox. Data sharing between the two entities can also produce significant customer knowledge for a tailored product offering.

Recent Developments

On March 16, 2017, the UK Secretary of State for Culture, Media and Sport, Karen Bradley, issued a European Intervention Notice (EIN). This triggered action from the relevant authorities (Ofcom and the Competition and Markets Authority) to investigate and report before May 16, 2017 (then extended to June 20) on the potential consequences of the deal regarding competition, public interest and media plurality.

On April 7, 2017, the European Commission approved unconditionally the deal under the EU Merger Regulation, stating that there was no concern for competition within the EU: the decision was mainly based on the different markets of the two parties (Fox is focused on the US while Sky operates mainly in Austria, Germany, Ireland, Italy and the UK) and on the limited competition between them (related to the acquisition of TV content and the supply of pay-TV channels).

UK Hurdles

However, the judgement by the European Commission was not in line with subsequent developments in the UK. On June 29, 2017, the Culture Secretary Karen Bradley made her statement to the Parliament, presenting the results of the investigations: the Ofcom report states:

“The transaction raises public interest concerns as a result of the risk of increased influence by members of the Murdoch Family Trust over the UK news agenda and the political process, with its unique presence on radio, television, in print and online. We consider that the plurality concerns may justify the Secretary of State making a reference to the Competition and Markets Authority.”

An analysis of the television industry in the UK is useful to understand the big picture and, somehow, might also explain better the reason underlying the concerns by the authorities. First of all, apart from the obvious synergies deriving by the structural traits of the two companies, the deal seems to be further justified by the latest positive trends in the UK television industry.

According to Statista, from 2009 to 2015 subscription revenue increased from £4.66bn to £6.2bn (+33%) and net advertising revenue increased from £3.14bn to £4.1bn (+31%) over the same period. But what is really impressive is the massive growth of the online TV sub-sector: in 2009 the revenue was equal to £95m, while in 2005 it reached £976m: in light of this, SkyGO, the online streaming platform by Sky, seems to be one of the main features that prompted Fox to secure the deal.

Other characteristics of the television industry in the UK might explain the worries about media plurality: in 2015, Sky was the biggest pay TV operator in the UK by number of subscribers: Sky had 10.8m subscribers, while Virgin TV, the second biggest player, had approximately one-third of that number.

The relevant authorities might raise concerns about the acquisition of such a significant group by a colossal of the media industry: conjugating all the different media platforms (TV, online, newspapers, etc.) under Murdoch’s control could lead to an excessive concentration, and a possible influence on the service delivered. Further, there are rumours about a possible “influence” also in terms of style: according to people familiar with the matter, the relevant authorities could have been influenced by how the channels of the two entities are commonly perceived.

SkyTG, which is usually regarded as a neutral source of information, is not in line with the style of Fox News which, according to many, is significantly biased. The acquisition of Sky by Fox might lead to a transformation of SkyTG in order to align it with Fox’s style.

Conclusion

After the statement, Ms Bradley proposed a two-week period for Fox to present a proposal to guarantee the independence of Sky and the assurance of media plurality. Considering that in the last few days Fox did not present any offer to secure the deal, a full inquiry represents now the most likely outcome: however, if investigation of the deal by the Competition and Markets Authority (CMA) is not ruled before Friday, the deal will be further delayed by the summer Parliamentary break.

The CMA investigation usually lasts 24 weeks but can be extended further, to 32 weeks. Therefore, Fox is facing not only the risk of a missed deal (in the case of a negative CMA report) but also the risk of a delayed approval, with sanctions connected to refund Sky’s shareholders (estimated in a total of £170m).

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