Rupert Murdoch’s bid for UK broadcaster Sky is now likely to face a full investigation

Key Points
  • Shares of Sky rose sharply on Thursday morning
  • The decision is now due in mid-July but the government added that it sees no material issues
  • Analysts had anticipated that a negative outcome would have wreaked havoc upon a share price
European Commission has approved Sky-Fox deal, UK decision eyed

Shares of Sky rose sharply on Thursday morning after the U.K. government said it would delay making a final decision regarding 21st Century Fox's takeover pursuit of the U.K. broadcaster to the domestic competition authority.

The decision is now due in mid-July but the government added that it sees no material issues with regards to broadcasting standards.

Despite U.K. Culture Secretary Karen Bradley acknowledging that the deal does raise public interest concerns regarding media plurality, traders' buoyant reaction signified that the perceived chances of the deal now succeeding had substantially improved.

This although Bradley said that on the basis of media plurality alone, the government was "minded to" refer the deal to the Competition and Markets Authority (CMA) for a six month in-depth "Phase II study" after which the regulator would revert with a decision on whether to clear the merger outright, clear it with conditions attached, or prohibit it.

Bradley deferred the decision until July 14, summing up her views in the following see-sawing conclusion:

"As required by legislation, I am giving the parties an opportunity to make representations in relation to media plurality grounds - where I am minded to refer for a phase two investigation by the CMA. In the interests of transparency and ensuring all the evidence has been considered, I will also invite wider representations on the question of commitment to broadcasting standards - where I am currently minded-not to refer for a phase two investigation," read Bradshaw in a prepared statement to the House of Commons on Thursday morning.

Her comments drove the share price to alternatively tumble and spike over each word she spoke.

By early afternoon Fox had responded saying that while it was pleased with the Culture secretary's comments on U.K. broadcasting standards, it was disappointed that she did not accept Ofcom's (the regulator's) view that Fox's proposed undertakings to maintain Sky News' editorial independence would mitigate media plurality concerns.

The U.S. media giant added that it would submit representations to secretary Bradley as she weighed her final decision and that should she indeed send the deal to the CMA, 21st Century Fox would expect the merger to close by June 30, 2018.

Sky's official response summarized Bradley's conclusions before adding, "Sky welcomes today's announcement of Ofcom's decision that Sky would continue to be a fit and proper holder of its broadcast licences under full ownership of 21CF and will continue to operate its business as usual."

Decision due on 21st Century Fox's takeover of Sky

'This is a very specific issue around Murdoch's family'

Analysts had anticipated that a negative outcome, whereby Bradley kicked the decision back to the U.K. competition regulator for a more detailed review, would have wreaked havoc upon a share price that has failed to even approach the £10.75 per share offer level since the bid was initially announced last December.

At Wednesday night's close, prior to the culture secretary's announcement, Sky shares were trading at around a near 11 percent discount to the offer price.

By 2:00 p.m. London time on Thursday, that discount had slightly shrunk down to around 7.3 percent with shares jumping up to £9.97.

While approving the deal was always going to be "very difficult" for the government, according to Ian Whittaker, media research analyst at Liberum, even a negative outcome shouldn't have had a significant impact on the U.K. media universe of stocks.

"This is a very specific issue around (Rupert) Murdoch's family and therefore a delay should not have made the U.K. market less attractive for mergers within the sector," Whittaker told CNBC via phone on Wednesday, adding that an offer for the U.K.'s second most viewed channel, ITV, is indeed likely to emerge in the coming months.

The sensitivity of the share price to today's decision was anticipated by analysts at UBS in a note earlier this month.

"Approval for the Fox/Sky deal is likely to be the main driver of the share price and an extended review would likely constrain the share price in the near-term," said the UBS team in early June, adding that they nonetheless remained positive on Sky from a fundamental perspective, regardless of the outcome.

The offer represents Rupert Murdoch and his son James's second stab at Sky after the bid made in 2010 fell apart following the sordid phone hacking scandal at the now-defunct News of the World newspaper which had resided within the family's stable of media assets.

Rupert Murdoch leaves the News Corporation building with his son Lachlan Murdoch (R) on July 21, 2016 in New York City.
Getty Images

In the intervening period, the Murdochs have reorganized their family trust's corporate structure, hiving off the Sky television assets and the remaining U.K. newspaper – comprising The Sun, The Times and The Sunday Times – into separate legal entities.

While this should have quelled some regulatory question marks over media plurality and whether or not the organization is sufficiently "fit and proper" to take full ownership of Sky, ongoing sexual harassment scandals at Fox News in the U.S. (another 21st Century Fox ultimate subsidiary via Fox Entertainment Group), had nasty overtones of the sleazy phone hacking inquiry that derailed the last merger process and led to elevated concerns in the market that the deal would once again crumble.

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