On 20 September 2017 the Secretary of State for Digital, Culture, Media and Sport, Karen Bradley (SoS), referred the proposed takeover of Sky plc by Twenty-First Century Fox, Inc. (Fox) to the Competition and Markets Authority (CMA) for a Phase II review on public interest grounds. Fox currently holds a 39 per cent stake in the broadcaster.
Background to the bid
The bid came five years after News Corporation abandoned a bid to take over British Sky Broadcasting Group plc (BSkyB), which later became Sky. At the time, News Corporation held various media interests, including UK newspapers such as The Sun, The Times, The Sunday Times and the now-defunct News of the World and global broadcasters such as Fox. The bid came during the phone-hacking scandal in which several News Corporation newspapers were shown to have hacked the phones of various public figures. It was referred to the Competition Commission (CC) (predecessor to the CMA) and ultimately dropped amidst crossparty opposition. Following the collapse of its bid for BSkyB, News Corporation’s broadcasting assets were spun off into Fox and its print operations into News Corp.
Merger control and regulatory review process
Fox notified the European Commission of the proposed takeover on 3 March 2017 and the Commission unconditionally approved the transaction on 7 April 2017, noting that it expected the takeover would lead to only a limited increase in Sky’s market share for the acquisition of TV content and the wholesale supply of TV channels. The Commission concluded that the deal would raise no competition concerns in Europe.
While the Commission has exclusive jurisdiction to assess the impact of qualifying transactions on competition in the EEA, under Article 21 of the EU Merger Regulation (EUMR) Member States may take appropriate measures, including prohibiting transactions, to protect other legitimate interests. In the UK, the SoS is able to issue ‘intervention notices’ (for mergers considered under the UK merger rules) and ‘European intervention notices’ (for mergers considered by the European Commission), triggering a consideration of specified (non-competition) public interest issues.
On 16 March 2017 the SoS issued a European intervention notice specifying as the relevant public interest considerations the effect that the takeover would have on media plurality in the UK and the commitment of Fox and Sky to broadcasting standards. Under this procedure, the Office of Communications (Ofcom) is then required to prepare a report examining and providing advice on these two public interest considerations.
Ofcom’s report was published on 20 June 2017. It concluded that the transaction raised media plurality concerns, since it would give the Murdoch Family Trust “material influence” over the news agenda and political process in the UK, with its unique presence in radio, TV, print and online media, and that these concerns may justify a reference to the CMA. However, although Ofcom had concerns relating to Fox News’ corporate governance procedures, it did not consider that the merged entity would lack a genuine commitment to the attainment of broadcasting standards and found that a reference to the CMA was not justified on those grounds. It noted that Fox and Sky’s compliance with Ofcom’s Broadcasting Code was in line with comparable broadcasters. Ofcom also stated that the proposed undertakings offered by Fox to maintain the editorial independence of Sky News would mitigate the public interest concerns, although there may be areas in which the undertakings could be strengthened. It added that behavioural undertakings may be difficult to enforce.
On 29 June 2017 Ofcom also published a separate ‘Fit and Proper’ decision. This related to Ofcom’s ongoing obligations under the Broadcasting Act to ensure that broadcasting licence holders are fit and proper, and found that Sky would remain so in the event of the merger.
The SoS indicated on 29 June 2017 that, consistent with Ofcom’s advice, she was “minded to” refer the deal to the CMA for a Phase II investigation on the media plurality ground only, and not to accept the undertakings in lieu of a reference that Fox had offered. However, in light of additional representations and further advice from Ofcom, on 12 September 2017 the SoS gave a second “minded-to” decision stating that she now planned to refer the merger on both the media plurality and broadcasting standards grounds. Although Ofcom had advised that a reference on the latter ground was not warranted, the SoS concluded that there were “non-fanciful concerns” relating to broadcasting standards that met the legal test for a Phase II reference. These included corporate governance failures at Fox and inadequate broadcast compliance procedures for Fox News in the UK. Following the expiry of the statutory consultation period, the SoS made a formal reference to the CMA on 20 September 2017.
The Phase II process
The CMA will now carry out a full and detailed investigation over a six-month period and report back to the SoS. It must reach a conclusion as to whether, based on the media plurality and broadcasting standards considerations, the proposed transaction operates or may be expected to operate against the public interest and, if so, what actions should be taken by the SoS in response. This could include requiring Fox and Sky to introduce remedies as a condition to allowing the acquisition to go ahead, or preventing the deal altogether. The SoS must have regard to the CMA’s report when reaching her final decision.
The threshold for a reference to Phase II is low: the SoS only needs to hold a reasonable belief that it may be the case that the transaction may operate or may be expected to operate against the public interest (i.e. where the risk is not purely fanciful). The CMA’s in-depth probe will assess whether the specified public interest considerations may indeed be under threat.
Interventions on public interest grounds are rare, and consequently Phase II reviews on public interest grounds are very unusual. The CMA has never carried out a Phase II review on broadcasting standards grounds, and there has only been one such review on media plurality grounds. This was in 2007 and related to BSkyB's acquisition of shares in ITV plc. As this transaction was subject to the UK, rather than the EU, merger control rules, the SoS’s reference to the CC was both on competition and public interest grounds. The CC concluded that the transaction may not be expected to operate against the media plurality consideration, but it found that the transaction would result in a significant lessening of competition within the UK TV market. The SoS made an adverse public interest finding based on the findings on competition impact and agreed with the remedies recommended by the CC that BSkyB be required to reduce its shareholding in ITV to under 7.5 per cent and give undertakings that it would not seek or accept representation on ITV’s Board.
The enquiry into Fox’s proposed takeover of Sky represents the first Phase II review to be carried out solely on public interest grounds. The CMA has published an administrative timetable which sets out how the enquiry will progress. Provisional findings are due to be issued during the week commencing 18 December 2017.