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Fox-Sky $14 Billion Deal Talks Said to Hinge on Structure

Fox-Sky $14 Billion Deal Talks Said to Hinge on Structure

(Bloomberg) -- 21st Century Fox Inc. and Sky Plc executives worked through the weekend with their advisers to nail down final terms of an 11.2 billion-pound ($14.1 billion) deal that would consolidate Rupert Murdoch’s television empire across two continents.

Fox’s co-chairmen, the 85-year-old media baron and his son Lachlan have been intimately involved in discussions to purchase the 61 percent of U.K. pay-TV service Sky that Fox doesn’t already own, according to people familiar with the situation. Rupert’s son, James Murdoch, who leads New York-based Fox as chief executive officer and is chairman of Sky, isn’t involved in the satellite broadcaster’s evaluation of the offer.

While the preliminary agreement announced Friday has the backing of Sky’s independent directors, some elements of the transaction remain under discussion. A key decision for Fox is whether to make an outright offer, or pursue a so-called scheme of arrangement, a structure that would involve U.K. courts but make it easier to mop up smaller Sky shareholders who refused to sell, said the people, who asked not to be named because the talks are private.

Friday’s announcement was also silent on whether Sky’s chief executive officer, Jeremy Darroch, will stay on once the company becomes part of Fox. People familiar with the matter said the question remained undecided but that Fox isn’t in a rush to shake up Sky management.

Representatives of Sky and Fox declined to comment.

Fox-Sky $14 Billion Deal Talks Said to Hinge on Structure

Sky shares advanced 27 percent in London on Friday, ending the day at 1,000 pence after the offer was announced. That’s below the 1,075-pence offer price, indicating investors see some risk a deal won’t be completed. While merger rules allow Fox until Jan. 6 to make a final offer, the company is working to sew up a deal by late this week, Wednesday at the earliest, the people said.

More Fox executives were heading to London and principals from both companies will be there over the next few days as they work to seal a final agreement, the people said. They said Fox is unlikely to raise its offer and that no major shareholders have objected to the price, 36 percent above Sky’s close the day before the announcement.

Sky’s deputy chairman, Martin Gilbert, is playing a significant role and had been pushing Fox to offer a substantial premium, according to one of the people.

The original offer from Fox, made to a Sky negotiating team led by Gilbert and senior independent director Andrew Sukawaty, was at a premium of about 30 percent to the Sky share price. The Sky team considered the offer but rejected it as too low, according to another person familiar with the situation.

Fox later last week came back with its current offer -- a 36 percent premium to Sky’s closing share price on Thursday -- which the Sky negotiators considered fair, this person said. The Sky team took into account greater competition from the likes of BT Group Plc on sports rights and other rivals such as Netflix, according to the person.

Mollifying Sky’s biggest shareholders by no means guarantees the deal an easy ride. At an October shareholder meeting, a significant minority protested James Murdoch’s return this year as chairman, citing board independence and the possibility of a new Fox bid for Sky. The last one was derailed in 2011 by a hacking scandal that preceded James Murdoch’s departure as Sky chairman in 2012.

Using a court-monitored scheme of arrangement would lower the bar for shareholder approval, though it’s generally more expensive and must be finalized more quickly. With the court’s backing, the scheme would require support from only 75 percent of shareholders other than Fox, making it easier to squeeze out Sky investors who dissent or don’t vote. With a straight offer, Fox would need 90 percent shareholder approval to acquire all the Sky shares.

Prime Minister Theresa May has been eager to promote investment in the U.K. in the wake of the Brexit vote, leading some analysts to predict the deal will gain approval. However, the proposal has awakened Murdoch antagonists and resurfaced residue from the hacking scandal, which could become obstacles.

Critics lined up quickly to call on May to scrutinize the new agreement carefully. Memories of the phone-hacking scandal, which shook Murdoch’s empire and exposed the seamier side of British journalism, remain fresh. Any move to concentrate media ownership could raise concerns about “plurality” -- diversity in the provision of news and entertainment.

“The way Theresa May’s government deals with this is a test of their independence from the influence of large proprietors,” said Vince Cable, who as business secretary under former Prime Minister David Cameron referred the previous takeover plan to regulators. “This poses a genuine threat to media plurality in the U.K., just as the bid six years ago did.”

--With assistance from Alex Sherman Matthew Campbell Eric Pfanner and Aaron Kirchfeld To contact the reporters on this story: Rebecca Penty in London at rpenty@bloomberg.net, Anousha Sakoui in Los Angeles at asakoui@bloomberg.net, David Hellier in London at dhellier@bloomberg.net. To contact the editors responsible for this story: Anthony Palazzo at apalazzo@bloomberg.net, Alistair Barr