On 3 March 2011, the UK’s Secretary of State for Culture, Olympics, Media and Sport, Jeremy Hunt, announced that he intended to approve the acquisition by News Corporation (“NewsCorp”) of British Sky Broadcasting Group plc (“Sky”). The approval would be conditional on NewsCorp giving the Secretary of State certain undertakings. Third parties have until 21 March to comment on the draft undertakings offered by NewsCorp. The review of this transaction has generated legal and political controversy in the UK.

The transaction would bring together two media giants

NewsCorp is one of the world’s largest media conglomerates, founded and controlled by Rupert Murdoch. It is a leading newspaper publisher in the UK and Ireland and a leading pay-TV operator in Italy, Germany and Austria. Sky is the only satellite broadcasting company operating in the UK and the largest British pay-TV broadcaster. NewsCorp has been a majority shareholder in the Sky for over twenty years and currently holds a stake of 39.1%.

On 10 June 2010, NewsCorp approached Sky’s board to propose an offer of 700 pence per share for the Sky shares that NewsCorp did not already own. Sky’s independent directors rejected the offer and said that they would only recommend an offer in excess of 800 pence per share. Nevertheless, Sky’s board agreed to cooperate with NewsCorp in seeking the required regulatory approvals.

The deal was scrutinised by both EU and UK regulators

Given the parties’ substantial revenues, the European Commission (“EC”) had jurisdiction to review the transaction’s impact on competition. On 21 December 2010, the EC cleared the transaction without imposing any conditions. The EC concluded that the parties’ activities were largely complementary and that the deal did not raise competition concerns.

The EC has exclusive competition law jurisdiction over transactions that meet EU notification thresholds. However, the EC Merger Regulation provides that Member States may intervene to protect certain legitimate interests, including plurality of the media. Similarly, the UK’s Enterprise Act 2002 gives the Secretary of State the power to issue an Intervention Notice in exceptional cases which involve “public interest considerations," such as media plurality. Media plurality means that there should be a sufficient number of independent media (particularly news) providers in the UK.

On 4 November 2010, the Secretary of State issued a European Intervention Notice.1 The Secretary of State instructed the UK Office of Communications (“Ofcom”) to investigate the media plurality issues that may arise from the proposed acquisition. Ofcom concluded in December 2010 that the transaction could compromise media plurality, given NewsCorp’s exceptionally strong position across all four media platforms (TV, newspapers, online and radio) following the transaction. Ofcom noted that the transaction would combine the second and fourth largest news providers and would consolidate NewsCorp’s position in second place (behind BBC), in terms of news consumption, in the UK.

NewsCorp offers to spin off Sky News

The UK’s Enterprise Act provides that following receipt of the Ofcom report, the Secretary of State must decide whether to refer the transaction to the Competition Commission, which he may do if he considers that it would operate against the public interest. The reference to the Competition Commission would have extended the review by up to nine additional months.

In order to avoid reference and to obtain swift clearance, NewsCorp offered undertakings to the Secretary of State. NewsCorp’s key undertaking is to spin off Sky News, Sky’s domestic and international news channel. The shares of Sky News would be distributed amongst Sky’s existing shareholders (including NewsCorp itself). As a result, while NewsCorp would increase its shareholding in Sky to 100%, its stake in Sky News would remain capped at 39.1%. NewsCorp would not be allowed to increase its shareholding in Sky News without the permission of the Secretary of State for 10 years.

Sky News would have a board made up of a majority of independent directors, including an independent Chairman. It would also have a corporate governance and editorial committee made up of independent directors. Sky News would enter into a long-term carriage and brand licensing agreements with the newly-merged NewsCorp/Sky.

The Secretary of State considers, having taken advice from Ofcom and the Office of Fair Trading, that these undertakings address concerns about media plurality. Third parties have until 21 March to submit their comments. A group of rival media groups called the proposed spin-off “window-dressing” and promised to contest the undertakings. The proposed use of undertakings, in lieu of a reference to the Competition Commission, is controversial and is likely to be raised in any appeal.