Kate Bulkley, Media Analyst.

Size is the name of the game

By Kate Bulkley

Broadcast News

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For Broadcast December 15, 2016

Fox needs Sky to compete with global digital players, says Kate Bulkley

Tis the season of goodwill, but the mood in boardrooms seems somewhat different: there’s a scramble for deals.

The latest bit of empire building is the move by 21st Century Fox to buy the 60% of Sky that it doesn’t own.

It’s not a shock that the Murdoch family wants to own all of Sky; they have tried to do this before. The last attempt was scuppered by the News Corp hacking scandal; James Murdoch stepped down as Sky chairman and the bid was withdrawn.

A lot has changed since then, including the separation of 21st Century Fox from the Murdoch newspaper businesses in 2013, but there are still issues around media plurality, the ‘fit and proper person’ rule and potential monopolistic control of production and/or distribution assets.

James Murdoch returned as chairman of Sky in January and both the fall in Sky’s share price this year (by some 30% before the new deal surfaced) and the fall in sterling post-Brexit have created an opportunity.

But there are also problems, not least of which is that the Sky board has accepted an indicative bid of £11bn (or £10.75 a share) before an official bid has been made. That has put the wind up several independent shareholders.

Will the deal happen? Probably, though conditions may be attached. These could include spinning off Sky News into a separate entity, and/or provisions that protect non-Sky or non-Fox-owned channels from being crowded out on the Sky platform – as sometimes happens on the homepage, where the Top Picks section often seems very Sky-heavy (Sky says these ‘picks’ are done by popularity, reviews and buzz).

What a Fox/Sky deal would create is an (even bigger) powerhouse that can compete with global digital players such as Google, Facebook, Amazon and Netflix. But more traditional rivals and frenemies would also feel the impact, including BT, which competes on sports rights; Liberty Global, owner of Virgin Media, which competes for pay-TV subscribers; and Discovery, which has an interest in live sport rights such as the Olympics.

Together, the Fox and Sky assets add up to a powerful cocktail: cable and satellite broadcasting across six continents; film studios; channels from Fox News to National Geographic to Star India’s vast portfolio; a 50% stake in Endemol Shine Group; pioneering direct-to-consumer services like Now TV; and sophisticated data crunching and targeted advertising.

With the cost of sports rights forecast to continue to soar, broadening out the business and controlling more original production are key to future success.

Recent deals like AT&T’s proposed merger with Time Warner are causing concern at Fox about its ability to compete with other companies that control both content creation and distribution.

It’s a big boy’s game in the sense that size does matter. Just this week, Canal Plus owner Vivendi in France made a hostile approach for Italy’s Mediaset, a few months after a negotiated deal between the two companies fell apart over valuation.

Plus, the Fox bid for Sky has reignited bid speculation for ITV, with its attractive broadcast and production assets.It’s going to be a fiery festive period. Mince pie, anyone?

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