From left: Paul Murray, Peta Credlin, David Speers and Kieran Gilbert with their Silver Logie for the Most Outstanding News Coverage during the 2017 Logie Awards at the Crown Casino in Melbourne, Sunday, April 23, 2017. Tracey Nearmy/Press Association. All rights reserved.For much of the 1980s, Rupert Murdoch steadily lost money on his Sky TV venture, initially offered as a pan-European service to owners of large satellite dishes. He assumed there was a pan-European advertising market: he was wrong.

When it became technically possible, in 1988, to deliver multiple channels to medium-sized dishes in the UK, Murdoch doubled down on his investment, even though he would now face a government-sponsored rival, British Satellite Broadcasting (BSB), using an even smaller “squarial” dish. At one point, in 1990, Murdoch’s master company, News Corporation, came close to breaching its banking covenants, as the losses at Sky mounted. It was a career-defining gamble.

As both satellite companies splurged cash in competing for ruinously expensive Hollywood studio deals, they stared bankruptcy in the face; and they eventually collapsed into each other’s arms, with control of the newly-formed BSkyB, although owned equally by the rivals, ceded to Murdoch.  The combined business was losing £10 million a week.

Studio deals were painfully re-negotiated: discussions with Disney were so brutal that all the negotiators abandoned the talks, leaving executives from both sides (I was one of them) trying to manage an output deal that existed as a rough outline on a single sheet of paper. Talks over supply of The Disney Channel were even more fraught, and, in due course, litigious.

BSkyB eventually turned the corner, and was floated on the stock exchange, allowing the original BSB shareholders to exit: a requirement of the flotation, to induce outside investors to buy shares, was for News Corp to reduce its stake to below 40%, even whilst explicitly retaining tight operational control….

Eighteen years later

By 2010, News Corp had taken dominant positions in the leading satellite enterprises in both Italy and Germany/Austria, and it became commercially obvious to consolidate all three businesses, starting with buying back the whole of Sky. So News Corp bid £7 a share for the 61% held independently, valuing the company at over £7 billion (the independent directors rejected the proposal, saying £8 was the minimum they could consider).

That bid was derailed by the phone-hacking scandal: the ensueing Leveson Inquiry and parliamentary hearings humbled (his word) Murdoch and damaged his newspaper empire (the News of the World was forced to close). The scandal also forced Rupert’s son James to resign as chairman of Sky, in order to avoid the company being adjudged by media regulator Ofcom not fit and proper to retain its many broadcast licences (he had been CEO of the newspaper division when News Corp failed to acknowledge, let alone root out, phone hacking and other criminal activities). Legal and closure liabilities, and compensation payments, cost News Corp the best part of a billion pounds…

After the failed bid

Yet the Murdochs bounced back. Ironically, the shameful activities at The Sun and the News of the World finally induced them to adopt a strategy many of their shareholders had long urged: splitting the print business (which inherited the old News Corp title) from the entertainment business (now titled 21st Century Fox – or Fox for short). As the value of Fox surged, the worth of the 39% held by the Murdoch Family Trust (MFT) in the two companies also grew dramatically. And because the consolidation of the three satellite TV businesses still went ahead, but was now financed through Sky, rather than through News Corp (or Fox), the MFT enjoyed a further cash benefit.

By the time the Murdochs (through Fox) returned to the Sky bidding fray, in December 2016, they valued the company they had created back in the 1980s at £17 billion, bidding £10-75 for each of the 61% of Sky shares not owned by Fox. Not long before then, the shares had fallen to below £8, as fears over the cost of football rights (which had soared after BT entered the premium sports market), and rapid expansion by rival subscription offers from Netflix and Amazon, depressed market expectations.

Yet even after the bid was made, the share price languished at barely £9: indeed, in my November 14 article on the prospects of the bid succeeding, I noted that investors were spurning a virtually guaranteed 20% return well within 12 months. Clearly, they had been spooked by the scale and intensity of the opposition the Murdochs faced….

The new opponents

Curiously, this time around most of the opponents of the 2010 bid – commercial rivals of News Corp in the shape of other UK newspaper groups, Channel 4 and even the BBC – had almost nothing to say that was hostile to the transaction. The dangers they had emphasised in 2010 – of the potential threat if the newspapers and television businesses were combined (which the EU competition authorities quickly dismissed as vastly over-stated) – were clearly sidelined by the new company structure: it would be illegal to merge any activities without formal approval from two different sets of shareholders.

But new – and more effective – opponents came to the fore: pressure groups such as Avaaz, 38 Degrees, Hacked Off and the Campaign for Press and Broadcasting Freedom, along with an array of academics. And the new structure of the Murdoch empire did not eliminate fears that the MFT might deploy the views published in the newspapers within News Corp (where it owned 39%) at Sky News, if Fox (where it also owned 39%) took full control of the broadcaster.

The absence of any prior attempts – across nearly 30 years – to influence Sky News was not sufficient to dissuade, first Ofcom, and then the CMA (the Competition and Markets Authority), from believing that – despite the existence of the Broadcasting Code forbidding the expression of views on Sky News, and despite Sky News and News Corp between them being responsible for only 10% of news consumption – the proposed transaction might reduce media plurality and therefore be against the public interest.

Even so – and especially with both regulators clearing the bid with respect to Fox’s genuine commitment to broadcasting standards – it was hard to see why market sentiment was so negative. After all, it seemed very obvious that Fox would offer undertakings to the CMA that wholly insulated Sky News from any possibility of MFT influence, whilst underwriting its losses for up to a decade: which would surely remove all media plurality concerns.

On Tuesday, February 20, Fox did indeed offer those pledges, and added a further dimension. In December, Murdoch had surprised the media world by agreeing to sell most of Fox (other than news and sports TV channels in the US) to Disney, in a deal valued at over $60 billion. The head of Disney, Bob Iger, described Sky as the jewel in the Fox crown, and it was assumed that, after Fox had completed its purchase of Sky, it would be passed on to Iger at the end of the lengthy regulatory scrutiny of Disney’s offer for Fox. As Disney – owner of ABC News in the US – was an uncontroversial owner of Sky News, many critics of the Fox bid dialled down their opposition. The Fox undertakings to underwrite Sky News’ losses for ten years would be inherited by Disney – a £200 million commitment that would be deducted from the Disney price for Fox….

Enter the “arbs”

The hedge funds, “value” funds and “arbs” (specialists in arbitrage situations) who had speculated in Sky shares now plunged in much more deeply. These funds are overwhelmingly US-owned or US-based, and the prospect of squeezing up the price Fox had offered, to reflect the larger significance of the Disney deal, had been boosted by three other factors.

First, Sky had cut a “mutual carriage” deal with BT, whereby their respective sports offerings would become automatically available on each other’s services. Most observers predicted that this would lead to a reduction in the price paid for renewing TV rights to the Premier League, by easing the competitive heat between the two main bidders. Last month, the auction outcome for the years 2019-22 duly revealed that Sky had actually reduced its commitment by £200 million a year. BT’s expensive venture into sports rights has helped reduce its market capitalisation by two-thirds in less than five years: last week, its enterprise value fell below that of Sky for the first time.

The second new factor – the assumption that Murdoch’s February 20 commitments to Sky News had clearly been pre-approved by Disney – meant that Sky News seemed safe for the foreseeable future, an outcome that was warmly received at an event organised by The Media Society on the question of the future of Sky News, that very evening. The “arbs” assumed that CMA approval of the Fox deal (even if the subsequent Disney bid never completed) was now certain.

The third factor was the continuing sets of positive results from Sky, confirming its resilience in the face of fierce competition. The twentieth consecutive year of revenue growth had delivered profits well above the £1 billion mark, and reflected some actual progress in both Italy and Germany/Austria (who between them only account for a third of Sky’s revenues, but where growth had previously been patchy)….

Enter Comcast

Then, on February 27, the price of Sky shares rocketed as a new player entered the contest: Comcast, the giant US cable operator. Comcast had reportedly tried to break up the Fox/Disney transaction by offering a higher price; but the Murdochs had seemingly calculated that a vertical deal (a cable company buying a content company) might face stiffer regulatory hurdles in the US than a horizontal deal (between two content companies).

This calculation may seem counter-intuitive: after all, horizontal deals can create or enlarge dominant positions, which are seen as anti-competitive (for instance, Disney and Fox combined have a 40% share of cinema box office in some territories). By contrast, a platform company buying content is usually seen as less threatening to consumer welfare.

However, the Trump administration has decided to oppose the bid by AT and T (a major telecoms and cable company) to buy Time Warner (home of HBO, CNN and a vast business producing and distributing content), claiming it will lead to higher prices for consumers (in previous years, Murdoch had also tried to buy Time Warner, and been rejected). That challenge will be decided by Judge Richard Leon, in a case starting March 19 and scheduled to take several weeks to conclude. His judgement is expected in the summer.

Not entirely by coincidence, Judge Leon also presided in anti-trust hearings over Comcast’s own purchase of a major content company, NBC Universal, seven years ago. That ‘vertical’ deal gave Comcast a foothold in the UK, with NBCU’s digital channels – including news – and production entities such as Carnival Films. These are highly unlikely to form a sufficient impediment to the proposed purchase of Sky, as they barely register on the media plurality scale…

A clear run for Comcast? And will they underwrite Sky News?

Not that Comcast can assume a clear regulatory run in the UK: it has had a number of problems with the US regulatory and legal system, as well as with unhappy consumers (“the world’s worst company” as some of them have dubbed it). Understandably, Fox is arguing that Comcast should undergo just as rigorous a scrutiny as it has experienced, should the intention to bid be confirmed.

As it happens, the public record of Comcast’s mis-steps and failings runs in uncanny parallel with the complaints made about Fox: sexual harassment, breaches of undertakings, suppression of journalism, and even an Ofcom sanction – a £40,000 fine, something not on the Fox rap-sheet – for broadcasting material unsuitable for children at the wrong time.

Will the pressure groups who have campaigned against Fox regard it as their public duty to take up cudgels against Comcast, too? Given Comcast’s indifference to the idea of ‘net neutrality’, there may be consumer groups who could choose to object to a Comcast purchase. Absent the involvement of politicians and the likes of Avaaz, it seems unlikely that the scrutiny process could reach the level of a formal intervention. But that absence cannot be assumed, and there is a low threshold for the Secretary of State to order a stage 1 Ofcom inquiry; if not into media plurality, then into broadcasting standards. Presumably, Comcast has factored that in to its calculations.

Just as Disney owns ABC News in the US, Comcast owns NBC News: there is no inherent reason for either to walk away from Sky News if they acquired it, other than the scale of commercial losses. But the Murdoch pledge of February 20 seems to bind Disney. All that Comcast has offered so far is recognition that “Sky News is an invaluable part of the UK media landscape” and an intention to “maintain Sky News’ existing brand and culture”: no mention of open-ended underwriting of losses. That ambiguity may not survive a formal regulatory review of Comcast’s bid, were it to happen: Tom Watson, Labour’s shadow culture minister, has already called for firm undertakings.             

Comcast’s next steps

The Comcast announcement did not commit the company to making a definite bid: yet the extensive detail in their preliminary documentation virtually guarantees that what was – under UK Stock Exchange rules – a non-binding rule 2.4 statement of intent will escalate to a binding rule 2.7 offer, probably next month. This short hiatus will allow Comcast to prepare the EU filings that are a requirement for a deal – with approval to be expected by mid-July.

A formal offer in April would force the independent directors of Sky to reconsider the agreement they entered into with Fox when they provisionally accepted its £10.75 per share bid. Comcast are offering £12.50 in cash, and are willing to leave Fox in place with 39%, provided they secure 50% plus 1 of Sky’s shares.

The initial reaction of the market was to boost the share price to a 10% premium above the Comcast offer, on the assumption that Fox/Disney would come back with a higher bid (the shares have slipped a little since then, but are still well above £13). Curiously, it is the Comcast bid which exposes the case for a much higher take-out price, in that it projects that an acquisition at £12.50 would be earnings positive in the first year (excluding transaction costs), even though there are no cost savings and virtually no synergies to be derived from combining two separate and different businesses. Comcast is quite open: the main benefit it would derive would be a re-balancing of its earnings, from 91% domestic to 75%.

So if £12.50 per share is the non-strategic value of Sky to Comcast – the hedge fund argument goes – the strategic value to Fox or Disney is much higher: anything from £14 to £16 a share is mooted. This is more of a pain to Fox than Disney, as any additional funds assigned to buying out the 61% would presumably be deducted from the deal value of Disney’s offer for Fox itself.

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So who will win?

On the face of it, speed of process, no media plurality concerns, a cash bid, and a target of only 50% plus 1 would put Comcast in pole position, absent a matching or higher offer from Fox. Neither Fox nor Disney can buy shares in the market (and so shutting out Comcast by acquiring the 11% needed to block Comcast’s path to 50%), pending the outcome of the current offer process; nor can Disney launch a bid of its own for Sky without the agreement of Fox.

If Fox does not increase its offer, Sky’s independent directors could clearly argue that they should be released from their agreement with Fox, allowing Comcast to see if they can reach the 50% plus 1 target at £12.50. Holders of 1% or more of a company’s shares must declare their position, and that has exposed about 17% of the equity in the hands of “arb” investors, with probably the same amount owned by others of that ilk, though with individual holdings below the 1% level. These funds are entirely cash-oriented: highest bid wins.

With 39% held by Fox, probably 34% in “arb” hands, and perhaps 10% held by non-professional investors, a residue of 15-17% is thought to be controlled by what are called “index funds”, who may sit tight until an unconditional offer is on the table from one party or another. Comcast would have to induce all the non-professionals and most of the index funds to accept its offer to meet its 50% plus 1 target, if Fox declined to sell its 39%.

It is possible that Fox/Disney might just sit tight on their 39%, and see if Comcast can achieve majority control. At that point, a calculation by both sides might involve exchanging stakes in the US on-demand video service Hulu (which will become 60% Disney-owned if the purchase of Fox is completed, with Comcast holding the balance, through NBCU) for stakes in Sky (which presumably would have then also ended up 60:40, this time in Comcast’s favour). There is a long history of stake-swapping between US media companies: another reason why the Comcast offer seems both risk-free and a pain in the neck for Fox/Disney.

Fox can – and probably will – win out in the end, by topping the Comcast offer, and slogging through the last stages of the approval process. But Comcast rarely lose a contested auction, and have plenty of fire-power in reserve.   

Back to the approval process

Meanwhile, the CMA final report on the Fox bid is due in May, with the new Culture Minister, Matt Hancock, scheduled to announce his response to it in June. The working assumption is that the MFT undertakings on Sky News will tip the CMA into approving the Fox purchase, leaving Hancock to choose between an outright endorsement of such a recommendation, or holding yet another consultation. It is hard to see that process going much beyond July.

By then Avaaz will have received the outcome of their application for judicial review of the original Ofcom clearance of the Fox bid. That appeal had been on the grounds that Ofcom’s analysis of evidence of Fox’s lack of commitment to broadcasting standards had been marred by factual error and mistaken methodology.

With all due respect to Avaaz, the chances of this review succeeding are effectively zero. Two Court of Appeal judges would have to conclude that, not only was Ofcom in serious error, but that no reasonable person could have reached the conclusions it arrived at. Indeed, even if they reached such a conclusion, the outcome would simply be a requirement that Ofcom review its process – and the chance of it arriving at a different decision is minimal.

Nor, indeed, could even that have an effect, as Hancock’s predecessor, Karen Bradley, over-rode Ofcom’s clearance of the Fox bid on broadcasting grounds, and invited the CMA to examine the objections all over again. This it did, and came to almost identical conclusions as Ofcom, both in terms of the evidence and the methodology used. Anyone with the patience to do so can follow the entire process on the CMA website, but I have singled out one of Avaaz’s objections as an example of what is involved.

The “foxification” of Sky News Australia

This is what Nick Flynn, legal director of Avaaz, told the CMA on October 27 2017:

“We also have an interesting example in Sky [News] Australia, where the ownership has gone recently from 33% to 100% and we would submit that you begin to see the Foxification of Sky [News] Australia as a direct result of that change of ownership. It is analogous to what is happening in the current merger.”

Ed Miliband, Vince Cable and Ken Clarke (who have formed a joint lobbying group opposed to the Fox bid) also wrote to the CMA, saying that “there has been an increase in right-wing voices [on Sky News Australia] since News Corp gained full control...they were part owners when these trends started, and they have increased since they took control.”

This is what Stewart Purvis told the CMA at its round table on media plurality on November 8, 2017:

“I will give you one example, in Sky News Australia, where they have adopted the Fox model of the primetime commentary programme, as opposed to the news programme, where their version of Mr Hannity, Mr Paul Murray, said of the defence minister, Mr Pyne, on June 26: ‘This is the type of bloke who, to use the Aussie-ism, if you were on fire, he wouldn’t piss on you. This is the bloke who, if he was at a social function, and met you, would be looking over your shoulder for someone more important than you. That is the measure of this wanker.’ He also called Mr Pyne an arsehole.

“If you have got a TV news operation run in that style and you have a broadsheet where you potentially control the editorial space given to political debate and commentary and you have got a tabloid which gives you the power to attack politicians and their policies and potentially over their private lives, you have a powerful line-up. No regulatory regime is going to pick that up as being undue influence. It just happens to be quite a powerful way to run a media empire in a new foreign country.

“I think it is not impossible that...if the [Fox/Sky] transaction were to happen, potentially that model might play out, subject to how the impartiality rules were interpreted...I think there is some evidence based on what happened with Sky News Australia when they moved from a shared ownership model to a complete control model, that that might happen.”

The clear implication from Stewart’s evidence is that the raucous style and right-wing tilt of Sky News Australia is a consequence of a deliberate act by the Murdoch Family Trust. Professor Steve Barnett made an almost identical case at the February 20 Media Society event.

“Sky News Australia is definitely not Sky News UK, nor has ever been”

John O’Loan (the Australian founding editor of Sky News in the UK) and fellow-Australian David Butorac (who spent 14 years at Sky UK before taking senior appointments at other pay-TV ventures) were puzzled to hear this claim at the Media Society event. According to Butorac, Sky News Australia (he was a director representing Sky News for many years) has had the same Managing Editor (Angelos Frangopoulos) for 20 years (Butorac was on the panel that appointed him).

“Angelos is one of the most respected and garlanded news executives in Australia,” says Butorac. “Sky News Australia is definitely not Sky News UK, nor has ever been. Its style has always been more populist than Sky News UK, but that’s more about the style of Australian TV news than down to influence from Rupert Murdoch or anyone else. The channel’s outspokenly political commentators (at various times, Andrew Bolt, Chris Kenny, Mark Latham, Paul Murray, Graham Richardson, Peta Credlin etc) have been in situ for many years (Latham was recently fired for making untoward comments). Nothing has materially changed since the change of ownership from Sky/Seven/Nine in equal parts to 100% News Australia at the end of 2016. Interestingly, the Australian equivalent of the BBC – the ABC – recently tried (and failed) to poach the political editor of Sky News: scarcely an indication that the service is politically skewed.”

O’Loan adds: “Paul Murray has been on the channel since 2010. Peta Credlin joined as a co-presenter, with veteran radio host Alan Jones, of a show that launched in 2014. Credlin is a former chief of staff for Liberal Prime Minister, Tony Abbott [in Australia, the Liberals are the right-of-centre party]. A previous co-host of the show was former Australian Labor Party leader Mark Latham, the former leader of the opposition in the federal parliament. The only significant change in presenter personnel since the shift to 100% NewsCorp ownership was the return of Graham Richardson, a senior Australian Labor Party figure and cabinet minister in several Labor governments, to co-hosting an evening show.”

The story of “foxification” of Sky News Australia that the opponents of the Fox bid seem to rely upon was written by the London-based Mark di Stefano in July 2017, quoting the view of Paul Barry, a presenter at the ABC, a fierce rival of Sky News. According to Buzzfeed, the opening monologues of Paul Murray’s 2-hour show are “littered with crude taunts and attacks against perceived ‘lefties’”. Unfortunately, the only tirade cited by Stewart Purvis was aimed at Christopher Pyne – a Liberal minister, who had recently himself been a co-host of a Sky News Australia talk show, partnered by a Labor shadow minister, Richard Marles.

Another senior Labor politician who served as a Sky News Commentator from 2014 to 2017 was Kristina Keneally, former Labor prime minister of New South Wales: it was an attack on her as “a Yankee sheila” by her fellow Labor veteran, Mark Latham, that led to his ousting (he had also handed out tongue-lashings to various other female targets, including a 15-year-old schoolgirl). What Buzzfeed did not seem to understand is that intra-party abuse is as much a feature of the raucousness in Australian media as cross-party insults.

The Buzzfeed article made much of the role of Peta Credlin. Yet her most revelatory material on Sky News Australia has related to the Liberal government she used to serve. Her sharp insights on Liberal Prime Minister Malcolm Turnbull (she dubbed the prodigiously wealthy former lawyer “Mr Harbourside Mansion”) helped Sky News Australia win Logie and Walkley awards for its 2016 election coverage.

That Sky News Australia’s most popular host (Paul Murray) is also a loud-mouthed right-winger has not stopped him winning industry recognition (such as “outstanding male presenter” in the 2015 Logie awards, and “outstanding news programme” in the 2015 Astra awards). And the claim that Sky News Australia was aping Fox News (with Murray and Andrew Bolt likened to Sean Hannity and Bill O’Reilly) dates back to at least 2010.

Some months before the Buzzfeed article – but after the change of ownership – senior Australian media commentator and academic, Denis Muller, explicitly differentiated between Fox News and Sky News Australia: “Someone who only watched Fox News would get a very distorted view of the world. This is not true of Sky. Its news service and its more sophisticated panels include a range of perspectives, even on major stories with an ideological bent. Such catholicity is not to be found on Fox News, and that is a significant difference between the two.”

The CMA report – upholding Fox’s genuine commitment to broadcasting standards – exhaustively pursued this line of inquiry. It cited the Muller article as rebuttal of the “foxification” claim. It politely failed to point out that the Miliband/Cable/Clarke evidence had mistakenly attributed to News Corp the 33% shareholding in Sky News Australia held by Sky News prior to the 2016 transaction.

News Corp actually had no interest, direct or indirect: even the Sky News stake represented just 33%, in which Fox (not News Corp) had a 39% interest, in which – in turn – the MFT had a 39% interest. The notion that an indirect 5% interest in Sky News Australia might allow the Murdochs to override their fierce commercial rivals – Channels 7 and 9, with 66.6% ownership – in controlling the editorial content of the service is the kind of stretch that has given some of the Fox bid’s opponents a bad name (Miliband and Cable were also responsible for the false claim that Sky News was responsible for 45% of UK radio news consumption: correct figure 2%).

What the CMA did establish (though it could not differentiate between repeats and original hours of broadcast) was a modest rise in the amount of commentary programming (mostly right of centre) since 2016. Frangopoulos would have explained this had they asked: his star sports presenter was poached by Channel 9, and the easiest way to fill the resultant gap in the schedule was to extend the Paul Murray show (the highest rating programme on the satellite service which carries Sky News Australia): nothing to do with the change in ownership, but nonetheless grist to the “foxification” mill.

The endgame?

Even for the most avid observers of the Sky saga, it must be a relief that a conclusion is in sight. Although there is an element of uncertainty as to the final CMA verdict, the response from the Secretary of State, the degree of scrutiny to which Comcast will be subjected and the Avaaz judicial review, it is reasonable to reach two conclusions: that Sky News will emerge safe and secure, and that the final ownership of Sky itself will come down to price. If Comcast presses on with its bid, Fox may have to top the £14 per share mark to prevail. If so, the independent directors who recommended the opening £10.75 offer will look foolish: but the “arbs” will have their day.