April 3, 2018

Breakingviews: Disney and Fox open door to higher Sky bid

by Breakingviews.

Sky investors on Tuesday received a mini Easter egg. Walt Disney is ready to buy the pay-TV group’s news channel to smooth the regulatory process for merger partner Twenty-First Century Fox. This signal of Disney’s commitment to owning the UK broadcaster boosts the odds of a bidding war with rival Comcast.

Rupert Murdoch’s Fox has been stuck in regulatory limbo since late 2016, when the 39 percent shareholder in Sky launched an 11.7 billion pound ($16.5 billion) offer for the rest of the company. Britain’s antitrust regulator said in January the deal could give Murdoch undue influence given his existing interests in the Sun and Times newspapers. But it also acknowledged that Fox’s $52.4 billion December all-stock tie-up with Disney, which would make the “Star Wars” producer Sky’s ultimate owner, offered ways around the problem.

Fox has come up with two new solutions that were published on Tuesday by the regulator. First, Sky News could be established as a distinct, “ring-fenced” company inside Sky, with its own board and guaranteed funding for 15 years. That’s a slightly stronger version of an idea which media watchdog Ofcom, the first regulator to review the deal, said would “mitigate” concerns.

Alternatively, Disney may pledge to buy Sky News. That would remove the political and regulatory heat from Fox’s bid for the rest of Sky. Unlike Murdoch, Disney has no meaningful news business in Britain and would therefore pose less of a concern to regulators.

The U.S. company’s willingness to countenance such a deal has more symbolic than financial significance. Loss-making Sky News is so small that its results aren’t broken out in the parent’s annual report. But the statement of intent is important given cable group Comcast lodged a possible offer in February that beat Fox’s bid for Sky by 16 percent.

Disney boss Bob Iger is unlikely to be interested in the small, unprofitable news channel on its own. His readiness to buy Sky News therefore signals a clear commitment to owning Sky. That was previously uncertain since Disney has argued it could buy Murdoch’s 39 percent without making a full bid, because owning Sky wasn’t necessarily the main motivation of the wider tie-up between Fox and Disney. That argument looks disingenuous after Tuesday’s move. There’s a growing chance that Murdoch and Iger will try to outbid Comcast to get what they want.

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