21st Century Fox Sets $23.2 Billion Pact to Acquire All of European Pay TV Giant Sky

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Courtesy of SKY

UPDATED with Fox statement

LONDON – 21st Century Fox has clinched a preliminary agreement to take over European pay-TV giant Sky in a cash deal valued at about $23.2 billion. The acquisition has been a long time coming for the Murdoch clan, which has long sought full control of the platform in which it already holds a 39.1% stake.

Fox’s effort to bring Sky into the fold reflects the newly ignited market for mega media mergers. AT&T in October set an $85.4 billion takeover of Time Warner that is now wending its way through the federal approval process. Lionsgate this week closed on its $4.4 billion acquisition of the Starz pay TV channels.

Sky is Europe’s leading pay TV platform with 22 million subscribers across five countries: Italy, Germany, Austria, the U.K. and Ireland. The satcaster is an MVPD that also offers its own proprietary news, sports and entertainment channels. It offers broadband and mobile service in the U.K. and Ireland.

“In the past several years, 21st Century Fox has consistently stated that its existing 39.1% stake in Sky is not a natural end position,” Fox said in a statement. “A proposed transaction between 21st Century Fox and Sky would bring together 21st Century Fox’s global content business with Sky’s world-class direct-to-consumer capabilities, which have made it the number one premium pay-TV provider in all its markets.  It would also enhance Sky’s leading position in entertainment and sport, and reinforce the U.K.’s standing as a top global hub for content generation and technological innovation.”

Sky first revealed the negotiations in a statement issued Friday. Sky said its independent directors have been in negotiations with Fox execs and accepted the offer price of $13.51 per share, which represents a roughly 40% premium over the closing price of Sky shares on Dec. 6.

Sky’s appeal to 21st Century Fox is clear. The company has solid growth prospects, and the consolidation Sky’s earnings with 21st Century Fox would provide a boost to Fox’s earnings. Moreover, focusing cash and resources on acquiring Sky will ease any lingering investor concerns about Fox mounting a run at costly acquisitions that might be more risky bets in technology or media. News of the deal sent Fox shares up by as much as $1 in midday trading but the stock was down 2% to $27.92 as the close of trading, despite the generally warm reception on Wall Street.

“We think investors were concerned that (Fox) would splash out into growthier/techier/riskier areas. Sky is well known to investors, generally liked, possibly highly synergistic and likely accretive to (earnings). This should help investors gain comfort in (Fox) longer-term,” RBC Capital Markets Steven Cahall wrote in a research note Friday.

Sky’s statement warned that deal terms are not complete and that there’s no certainty of Fox making a formal binding offer. But the media biz has been waiting for years for Fox to pounce again on Sky after its previous effort to acquire the outstanding 60.9% foundered five years ago amid Britain’s phone-hacking scandal. The timing of the new bid is no surprise given the decline in Sky’s share price in recent months and the steep fall in the value of the pound following June’s Brexit vote, which has made the deal much cheaper in dollar terms for Fox.

The hacking scandal, in which some Murdoch-owned tabloids were found to have illegally intercepted voicemail messages on the cellphones of celebrities and even of a murdered teenager, badly damaged the Murdochs’ standing in Britain and torpedoed their attempted takeover of Sky just as a deal was on the cusp of being done. Fox CEO James Murdoch was in the thick of the controversy as he was the exec in charge of the newspaper division at the time. Murdoch is also a former CEO of Sky and has made no secret of his interest in controlling the business.

“It’s inevitable. You have AT&T buying Time Warner, you have Comcast-NBCUniversal. [And now] you have Fox combining itself with Sky. It’s all these content companies making a bid as it relates to pay-TV assets,” said Mary Ann Halford, media specialist and senior managing director with FTI Consulting in London.

Given that Fox has maintained a war-chest ever since the aborted 2011 takeover, media biz watchers have known that it was a matter of when, not if, Fox would make another run at Sky after the political smoke cleared. As of the most recent quarter, Fox has about $4.7 billion in cash on its books.

“It’s no longer as immediately toxic as it would’ve been had they tried to proceed at the time” of the hacking scandal, said Mathew Horsman, a media analyst in London and the author of “Sky High: The Inside Story of BSkyB.” “The desire to do it and possibly the logic in doing so was always there.”

But the fading of the hacking scandal is no guarantee that the takeover will go unopposed. Vince Cable, the former British business secretary, said that “this is yet again a threat to media plurality [and] choice.”

21st Century Fox has a different corporate configuration than its predecessor, News Corp., when the last run at buyout out Sky was made. In 2012, in part because of the hacking scandal, chairman Rupert Murdoch decided to split his operations into two companies, 21st Century Fox for the media and entertainment assets and News Corp. for the newspaper and publishing assets including the Wall Street Journal, New York Post and U.K. newspapers.

That split should help smooth the regulatory approval process for the deal in the U.K. Last time around in 2011, there were some hiccups regarding News Corp.’s cross-ownership of major TV and newspaper assets. But that conflict does not exist with 21st Century Fox as the acquiring vehicle. Horsman said that he sees no regulatory problems in Europe that would sink the deal.

Sky said it has formed a committee of independent directors to hammer out the acquisition deal. The committee comprises Sky’s CEO Jeremy Darroch, Martin Gilbert, Andrew Sukawaty, Andrew Griffith, Tracy Clarke, Adine Grate, Matthieu Pigasse, and Katrin Wehr-Seiter.

Rupert Murdoch launched Sky, which had an initial four channels, including Sky News, as a U.K. satellite service in 1989. It added its sports service two years later, and exclusive sports rights became a primary means to enlist new subscribers. Sky was seen as a long-shot bid to inject new competition into the U.K. TV market. The success of the company against those odds, after enormous investment from News Corp. amid investor skepticism, greatly enhanced Murdoch’s reputation as a visionary media mogul.

The company originally known as British Sky Broadcasting has gone through numerous iterations since its early days. Sky Italia was created through a merger of two existing Italian pay-TV operators in 2003, and German pay-TV service Premiere was rebranded as Sky Deutschland in 2009. In 2014, Sky in the U.K., Germany and Italy merged, a move that has been seen as a prelude to further expansion in Europe. Now TV, its low-cost subscription streaming service in the U.K., may be one method to enter new territories.

The company ramped up its investment in premium drama series with the launch of the Sky Atlantic channel in 2011 in the U.K. Sky Atlantic through licensing pacts is now the exclusive home of HBO and Showtime series, as well as Sky’s original productions, such as “The Last Panthers,” “Fortitude,” and “The Young Pope.” Big-budget drama is increasingly seen as a means to compete with competitors, such as BT Vision in the U.K.

Henry Chu in London contributed to this report.