Fox offers sale of Sky News to clear merger

Fox offers sale of Sky News to clear merger

Alice Enders                         The Competition and Markets Authority (CMA) will report
+44 207 851 0909
alice.enders@endersanalysis.com      on the public interest (PI) aspects of the Fox/Sky merger on
                                     1 May to Secretary of State (SoS) Matt Hancock, who will
16 April 2018 [2018-031]             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’
Related reports:                     demand for prohibition, which might have led to the latter being chosen.

CMA issues provisional findings in   At the CMS, third party politicians Ed Miliband, Sir Vince Cable, Lord Falconer and
Fox/Sky [2018-007]                   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
21CF and Sky transaction heads to
the CMA [2017-089]                   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
End-game for the merger of 21CF      therefore expected to choose a remedy to ensure their concerns are fully met,
and Sky [2017-059]
                                     which points to the sale of Sky News to Disney upon Fox/Sky’s completion.
21CF and the bid for Sky: state of
play [2017-024]
                                     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
21st Century Fox and Sky seeking     £12.50/share could be formalised in early May, along with their notice to the EU
merger clearance [2016-128]          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
Sky News [2011-023]
                                     course to clinch the purchase of Sky.
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.


2 | 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)



3 | 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.



4 | 5 Fox offers sale of Sky News to clear merger [2018-031]                      16 April 2018
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5 | 5 Fox offers sale of Sky News to clear merger [2018-031]                                        16 April 2018
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