Fox offers sale of Sky News to clear merger

Fox offers sale of Sky News to clear merger

Alice Enders +44 207 851 0909 alice.enders@endersanalysis.com 16 April 2018 [2018-031] Related reports: CMA issues provisional findings in Fox/Sky [2018-007] 21CF and Sky transaction heads to the CMA [2017-089] End-game for the merger of 21CF and Sky [2017-059] 21CF and the bid for Sky: state of play [2017-024] 21st Century Fox and Sky seeking merger clearance [2016-128] Sky News [2011-023] The Competition and Markets Authority (CMA) will report on the public interest (PI) aspects of the Fox/Sky merger on 1 May to Secretary of State (SoS) Matt Hancock, who will announce his decision on 13 June to the Commons Fox has offered to sell Sky News to Disney, which will prevent the Murdoch family from ever exercising control or influence and might appease opponents of the merger The CMA is likely to advise the SoS to clear the merger, conditional on the Sky News sale to Disney, which the SoS could accept.

Fox will then participate in the end-game for Sky, where Comcast is also a determined bidder With just a few weeks left on the clock of the CMA’s public interest (PI) inquiry into the Fox/Sky merger, the CMA has two more options on offer from Fox, to remedy the post-merger increased influence of the Murdoch family over Sky News: • Option 1 remains the “Firewall Remedies”, behavioural in nature, with a 10 year funding commitment to Sky News • Option 2 creates Newco to house Sky News, underpinned by operational agreements with Sky, which promises funding for 15 years • Option 3 divests Newco to Disney as the Fox/Sky merger proceeds, with Disney assuming a 10 year funding commitment to Sky News This full range of options for the CMA’s decision on the appropriate remedy does, in our opinion, open the way to a successful clearance of Fox/Sky.

The CMA no longer faces a stark choice between a behavioural remedy and opponents’ demand for prohibition, which might have led to the latter being chosen. At the CMS, third party politicians Ed Miliband, Sir Vince Cable, Lord Falconer and Kenneth Clarke oppose the merger. In a letter on 21 March 2018, Ed Miliband et al. explained that “politicians are in a position of particular susceptibility in respect of media public interest cases because of the influence media owners have, or are perceived to have, over the fortunes of politicians and their parties.” The CMA is therefore expected to choose a remedy to ensure their concerns are fully met, which points to the sale of Sky News to Disney upon Fox/Sky’s completion.

After Fox/Sky clears in the UK, the battle for Sky can enter the end-game. Disney and Fox are now in tandem, according to the Takeover Panel. Comcast’s bid of £12.50/share could be formalised in early May, along with their notice to the EU Commission, requesting approval on competition grounds. Fox’s £10.75/share bid looks light in comparison, although we expect Fox to improve its offer in due course to clinch the purchase of Sky.

Fox offers sale of Sky News to clear merger

2 | 5 Fox offers sale of Sky News to clear merger [2018-031] 16 April 2018 State of play on Fox/Sky On 23 January 2018, the CMA published its provisional findings on Fox-Sky, deciding the merger is not in the public interest (PI). As we had predicted, the CMA’s provisional findings at Phase 2 were very similar to those made by Ofcom at Phase 1, and relied on the same reasoning. We expect the CMA to confirm these findings in the final report issued to SoS Matt Hancock on 1 May 2018. Unless the report is leaked, it will be in the public domain by early June.

The post-merger harm provisionally identified by the CMA is the increased control and influence of the Murdoch family over Sky News, despite the structures imposed by Ofcom’s Broadcasting Code. This finding, on media plurality, comforted the stance adopted (at the CMA) by third party politicians, Ed Miliband, Ken Clarke, Sir Vince Cable and Lord Falconer. They have consistently argued to the CMA that the Fox/Sky merger should be prohibited.

The CMA did not however find that Fox would lack a “genuine commitment to broadcast standards” in the UK, in a significant setback to third parties Avaaz/MMA, which have since ceased to participate actively in the PI proceeding.1 The PI proceeding is currently in the crucial remedies phase. Fox has now lodged a full range of behavioural and structural remedies at the CMA. The CMA’s final report to SoS Hancock will contain its choice of the appropriate remedy to address the post-merger harm to the public interest it has identified. With the demise of the reference on broadcast standards and the retreat of third party Avaaz/MMA, the CMA and politicians have engaged in a veritable dialogue.

Recall that one of the unusual features of the Fox/Sky PI proceeding is that no companies are involved and opponents consist mainly of serving politicians and civil society groups.2 The politicians reinforce their action at the CMA through interventions in Parliament supported by deputy Labour leader Tom Watson. The ascendance of the politicians as the official opponents of the Fox/Sky merger explains why we expect the CMA to select the remedy for Sky News that best meets their concerns. This would secure the highest degree of autonomy of the news business from the Sky mother ship, namely the sale of Sky News to Disney upon completion of Fox/Sky.

The Sky News business will never pass through the hands of the Murdoch family, even on a temporary basis pending clearance of Disney/Fox.

Anticipating the receipt of the CMA’s final report on 1 May, the SoS will announce his decision on the merger to his fellow politicians in the Commons on 13 June. Although the SoS may refuse the CMA’s advice, e.g. prohibit a merger the CMA has cleared, we expect him to follow the CMA’s advice to clear the merger and defend the work of the CMA on Fox/Sky in the Commons. The fact that Fox convinced Disney to buy Sky News in advance of Fox/Sky completing itself demonstrates an already deep entente between the companies. Disney is prepared to assume the obligations on Sky News, that Fox is prepared to assume, in order to clear Fox/Sky.

This all cements Disney’s desire to be the future owner of all of Sky, and to assist Fox in the final stages of acquiring the company. 1 Ofcom had separately determined in June 2018 that Fox met the fitness and propriety standard required for the company to assume Sky’s 54 broadcast licences. Ofcom is facing judicial review of this decision, with Avaaz/MMA citing “fatal flaws” of “law, fact, and reasoning”.

2 The Media Reform Coalition (MRC) is a group composed of academics engaged by journalism studies.

3 | 5 Fox offers sale of Sky News to clear merger [2018-031] 16 April 2018 By 13 June when the SoS delivers his decision to the Commons, Sky shareholders will be enviably wooed by two bidders. Comcast is finalising a competing offer of £12.50/share. When this happens, Fox’s offer for Sky of £10.75/share will look light, and we expect a higher offer to be made upon Fox/Sky’s regulatory clearance. Remedies The CMA’s Remedies Notice accompanying its provisional findings outlined all possible remedies to the provisionally identified post-merger harm, from outright prohibition of the merger, to structural solutions (e.g.

sale or spin-off of Sky News) or softer behavioural ones. The CMA also cited the proposed Disney/Fox merger announced 14 December 2017 as a future material change of circumstances that could accommodate a “sunset” clause for the remedy. To recall, the CMA’s Inquiry Group will choose the least costly option to “remedy, mitigate or prevent the media plurality concern identified or any resulting adverse effects” which could have been caused by the Fox/Sky merger. In competition cases, two types of remedies may be considered: • Behavioural remedies: ongoing measures designed to regulate the conduct of the merging parties, thus requiring ongoing monitoring • Structural remedies: one-off measures, spanning prohibition and divestiture, designed to fully restore the structure of the market It is well known that structural remedies are generally preferred by the CMA to behavioural ones, because the former address the source of the harm and are one- off, avoiding the design, monitoring and enforcement risks of behavoural remedies.

Although behavioural remedies are rarely accepted in Phase 1, they may be considered in Phase 2 of CMA proceedings. However, they are only used in competition cases when structural remedies are not feasible, or when requiring them would forego significant consumer benefits of the merger. In Fox/Sky, there are no such consumer benefits cited by the merging parties, and a structural remedy is feasible, making a structural remedy the CMA’s natural preference. Fox has consistently proposed a behavioural remedy to address any harm to the public interest that might finally be identified (which it understandably denies).

In Phase 1, overseen by Ofcom, Fox had undertaken to operate an independent “Editorial Board” for Sky News and fund the news channel for 10 years. In Phase 2, Fox has pledged to the CMA similarly dimensioned “Firewall Remedies” as Option 1 to consider, including a 10 year commitment to fund Sky News. In our view, this was never going to be sufficient to appease political opponents, whose animus against the Murdoch family has deep-seated roots in the 50 years since Rupert Murdoch first acquired a news title in the UK. This animus has been fostered by a long list of contested commercial and editorial practices by titles controlled by the family, laid out in sumptuous detail in Part One of the Leveson Inquiry, as well as allegations of ‘blagging’ and ‘hacking’ activities at The Sun which are in civil litigation.

It is also routinely pointed out that Rupert Murdoch did not observe the 1981 undertakings he made to the UK Government to acquire The Times (which were not the subject of a formal agreement), apparently indicative of a cavalier attitude towards all conduct-related undertakings. Indeed, at the hearing conducted by the CMA with politicians on 21 February 2018, Ed Miliband said, “any behavioural remedy by its very nature intrinsic to that behavioural remedy, leaves Sky News a division of Fox, leaves Fox in charge of the budget, leaves Fox in charge of the brand and gives Fox enormous power.” (p.

11)

4 | 5 Fox offers sale of Sky News to clear merger [2018-031] 16 April 2018 On 4 April, Fox added two further options: • Option 2: creation of subsidiary Newco to house Sky News on a cash-free and debt-free basis; appointment of independent Directors only, to ensure full editorial independence; adherence to Sky News Editorial Guidelines; arrangements with Sky to ensure operation, including agreements on EPG services and brand licensing; commitment to maintain the financial envelope for 15 years • Option 3: sale of Newco to Disney, plus a commitment to maintain the financial envelope for 10 years This brings us back to the question of the feasibility of a structural remedy.

In its Remedies Notice for Fox/Sky, the CMA considered the undertakings accepted by former SoS Jeremy Hunt in Phase 1 of the 2010-11 News Corp/Sky PI proceeding. The major hurdle at the time—which persists today—is that Sky News is a loss- making operation, making it hard to find a suitable buyer, and it cannot operate independently of Sky in practice. In 2011, the spin-off of Sky News into an AIM- listed company required months of work on the contractual arrangements with Sky that would underpin its continued operation. Even so, there were lingering doubts as to the feasibility of an arrangement that would leave the Sky News company minority-owned (39%) by News Corp, and entirely reliant on Sky for funding.

Both the behavioural and structural options now on offer from Fox ensure that funding of Sky News is not contingent on a decision form Sky. This severs one source of influence that the future owners of Sky may exercise over Sky News. However, the lever of funding is not the only aspect of the direct or indirect influence of the Murdoch family over Sky News that is of concern to Ed Miliband et al.. Under the behavioural remedy, Sky would appoint the Head of Sky News and decide the strategic direction. Sky News would be wholly reliant on Sky for branding and carriage. Even though Sky News would remain under the umbrella of Sky—and therefore Fox—only during the short period of time required to clear Disney/Fox, this potential for influence is also rejected by the politicians.

For these reasons, the CMA is unlikely to accept a behavioural remedy, which would not effectively address the concerns raised by politicians (that the CMA has accepted). As between the two further remedies that Fox has now lodged, the sale of Sky News to Disney is likely to be chosen by the CMA, in our opinion, mainly because the CMA would prefer a structural remedy that is feasible and entirely addresses the issues raised by Ed Miliband et al., for all of time. A subsidiary structure of Sky News might smell and taste like structural separation, but Sky News would still remain part of Sky for the duration of the remedy, requiring a monitoring trustee on a long-term basis.

A subsidiary structure might not allow for any direct influence from the Murdoch family, but the politicians who oppose the deal claim the family’s influence may continue, invisible to the naked eye. Ed Miliband et al. have never wavered from their belief that the CMA must prohibit the merger, ostensibly to stall any expansion of the influence exercised by the Murdoch family over UK news. Their aim can now also be achieved by the sale of Sky News to Disney, which is why we expect the CMA to clear the merger, conditional on that course of action.

In Parliament, the politicians will continue to insist that the merger be blocked, reflecting the animus against Rupert Murdoch. Now, with a second option, the merger should be cleared, and with a robust structural remedy in place, we envisage SoS Matt Hancock will be able to endorse the findings of the CMA and open the door to clearing Fox/Sky on PI grounds, in the UK.

5 | 5 Fox offers sale of Sky News to clear merger [2018-031] 16 April 2018 About Enders Analysis Enders Analysis is a research and advisory firm based in London. We specialise in media, entertainment, mobile and fixed telecoms, with a special focus on new technologies and media, covering all sides of the market, from consumers and leading companies to regulation.

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