Fox's Sky takeover faces major political obstacles, analysts say

Analysts said Sky's takeover by Twenty-First Century Fox faces several obstacles, including the new political climate, 'fit and proper' tests of directors and the objections of shareholders over the price.

On Friday, Rupert Murdoch’s Fox approached the FTSE 100 company with a preliminary offer to take full control of the 61% of Sky that it does not already own for £10.75 per share, a 36% premium to Thursday’s closing price.

Newspaper reports over the weekend and on Monday cited several institutional shareholders, including Standard Life, Jupiter, Royal London and others, criticising Sky's independent directors for rolling over and recommending the £18.5bn deal as it was seen as opportunistic in light of the post-Brexit decline in the shares and the pound.

Berenberg suggested on Monday that a likely test by media and telecoms regulator Ofcom of whether Murdoch and his son James, who is chief executive of Fox, are 'fit and proper' will prove a key hurdle in the Nasdaq-listed giant's attempt to acquire Sky.

Following the phone hacking scandal and Leveson inquiry, Ofcom's review into whether Sky was a fit and proper entity to own a broadcasting licence was highly critical about Sky chairman James, though it was not enough to impact the test as a whole.

"This was, however, mitigated by the fact that there were other directors or shareholders," wrote Berenberg analyst Sarah Simon. "With Sky now set to be fully owned by Fox (and thus the Murdochs), the question may be raised again. The Leveson inquiry was very critical of News Corp’s management."

The political climate under Theresa May is potentially an even bigger issue for Fox, said Simon, with the new Prime Minister's government being torn between criticism of foreign takeovers while still wanting to encourage continued investment into the UK.

"David Cameron was seen as sympathetic to the Murdochs, while Theresa May will likely wish to be seen as not being in the hands of big corporates," Simon said. "The culture secretary, Karen Bradley, is an unknown quantity, having come from a different ministry, while Sharon White, head of Ofcom, has been taking a tough line with companies that are not driving benefits for consumers."

While also wondering whether the move from Murdoch family's control over 39% of Sky to full ownership would act as sufficient delta to challenge the fit and proper test, Olivetree analysts agreed that politics were likely to play an even bigger part.

"Even though the acquiring entity is different this time, and Fox owns no print media assets, both it and (new) News Corp are still controlled by the Murdochs, it will be interesting to see how strictly a majority Conservative government looks to interpret Media Plurality rules in the current political backdrop.

"With no specific measures contained in the demerger of Fox and News Corp to ultimately ring-fence total independence of the two assets, whilst having two separate legal entities may be deemed sufficient to avoid a review under Plurality issues, the questions will remain as to whether the current political backdrop will be sufficient to push this into a review."

Olivetree noted that a previous version of the current government was happy to approve this transaction with a demerger of Sky News as a remedy, but the transaction will anyway be at the forefront of political discussion.

Analysts at RBC Capital Markets, which ruled out the likelihood of any other bids for Sky and noted that Fox has to make a ‘put up or shut up’ offer to Sky by 1700 GMT on Friday 6 January, saw a "high likelihood of deal approval in our view" and felt the merger-arbitrage spread of 6.2% on the closing price of £10 was "attractive".

RBC also said looking at the history of the deal was "key to understanding the regulatory risk".

Since the aborted Sky offer of 2011, the UK government has undertaken a review of the media plurality laws in the country, suggesting a broadening of the scope of the review to include the provision of digital news services.

Under the Enterprise Act 2002, once the deal has been notified to the CMA, culture secretary Bradley will have 10 days to decide whether to issue a public intervention notice (PIIN), where she would be required to specify what concerns are raised by the transaction, including issues of plurality.

According to the regulation, once the PIIN is issued Ofcom will conduct an initial investigation into the bid, a process that lasts 20 working days.

If any issues are raised then Bradley would have the ability to broker a compromise with Murdoch and if that is not successful she would have to refer the case to the CMA to conduct a deeper six-month phase II review.

"With the previous bid so fresh in the mind along with the accompanying issues, and Sky pushing so hard for the break-up of BT, there is likely to be immense pressure on Brady to not just be seen to 'wave this one through'," Olivetree said.