Fox Reaches for Sky

Fox to Acquire Sky Shares in a Deal Valued at $14 Billion

Last week, 21st Century Fox, the media company controlled by the Murdoch family, and Sky, the UK satellite pay-TV company, announced an agreement in principle for Fox to acquire shares of Sky in a deal valued at about $14 billion.

Fox already holds a 39 percent stake in Sky and a potential deal seemed inevitable once James Murdoch became chairman of Sky earlier in 2016. Furthermore, Fox has made no secret of its ambition to buy the broadcaster outright following previous failed attempts by Rupert Murdoch. This is an opportunistic moment given favourable market conditions with the pound falling, but there are already calls for regulators to intervene owing to Sky’s dominant position in the media landscape.

Sky traces its origins back to Sky Television, which was launched by Rupert Murdoch in 1989. Sky later merged with rival satellite broadcaster British Satellite Broadcasting in 1990 diluting Mr Murdoch’s stake in the company. Sky offers television, broadband and telephone services, and has customers in Austria, Germany, Ireland, Italy and the UK. It exclusively licenses a variety of television shows from AMC Networks, HBO and Showtime in Europe, including Game of Thrones, The Affair and The Walking Dead. It also broadcasts football leagues in Germany, Italy and the UK. Sky sees a significant opportunity to grow its customer total in Europe, given the low pay-TV penetration in markets such as Germany and Italy.

21st Century Fox is the legal successor to News Corp, which was founded by Rupert Murdoch in 1979, and deals primarily in film and television. With growth slowing in the US, the company has looked for ways to take its content directly to consumers. This included a deal in November 2016 to provide live streaming of its television channels through a new service being introduced in 2017 by Hulu, which 21st Century Fox partly owns.

Fox is likely to have been motivated to make the move now as a global race to merge content and distribution channels heats up. AT&T’s proposed acquisition of Time Warner may also have been a catalyst. Fox believes the combined company will help it tap into the direct-to-consumer streaming capability of Sky, whose offerings include Now TV in the UK and Sky Ticket in Germany. The acquisition would enable Fox, which owns streaming services like hotstar in India and a share of Hulu in the US, to position itself to better compete against streaming services such as Netflix.

By consolidating Sky’s cash flows, Fox hopes to diminish its reliance on the US market. We expect the move to help Fox diversify its revenue as its main source of profit — cable affiliate fees — is threatened as a result of cord-cutting in the US. In addition, cable TV ratings for sports and entertainment channels have been falling, leading to lower ad revenue. Ownership of Sky would provide Fox, whose cable networks include Fox News and FX, subscription revenue from a pay-TV network spanning 22 million households in Europe. This market hasn’t been as affected as the US by cord-cutters who drop cable subscriptions in favour of online subscription services. Fox, in its current avatar, is tethered by legacy business models and unable to provide a great deal of flexibility in altering the digital landscape.

For Sky, this is a significant move. One that will give it financial security and confidence to bid for premium content rights in the future. The broadcaster continues to face strong competition from the likes of BT and online video providers to secure major sports rights. All eyes are currently on the UEFA Champions League sports rights that BT currently owns in the UK.

The industry shouldn’t rule out the possibility of Sky taking its successful Now TV service in the UK into new European markets. Furthermore, we expect more US content and media owners, including Comcast, to make the jump across the pond (see CCS Insight Predictions for 2017 and Beyond).