(Bloomberg) -- The U.K. plans to expand its probe into 21st Century Fox Inc.’s bid for pay-TV broadcaster Sky Plc, exposing Rupert Murdoch and his family to further scrutiny over governance at their media empire and adding to the uncertainty about the 11.7 billion-pound ($15.5 billion) deal.
Culture Secretary Karen Bradley is inclined to ask the Competition and Markets Authority to conduct a months-long investigation into Fox’s commitment to broadcasting standards, in addition to a widely expected CMA review over whether the deal would give the Murdochs too much influence over U.K. media, she said Tuesday in Parliament.
The scope of the planned CMA referral surprised investors, given Bradley had said after an initial review she planned follow the advice of communications regulator Ofcom and confine any further inquiry to questions of the Murdochs’ media influence, rather than their conduct. Shares of Sky fell as much as 5.1 percent, the biggest drop since the U.K.’s June 2016 vote to leave the European Union.
Clinching the rest of 39 percent-owned Sky would give Murdoch control of one of the most powerful pay-TV distribution platforms in Europe. A tie-up would also broaden Fox’s revenue streams, increase its geographic diversity and bolster its portfolio of drama and sports content.
Fox Chief Executive Officer James Murdoch and fellow managers now face the prospect of months of interrogation over recent events at scandal-hit Fox News and past corporate governance failings at Murdoch media outlets. Wrongdoing at News Corp.’s U.K. newspapers scuppered a 2010 attempt to buy the rest of Sky, while this time, sexual- and racial-harassment allegations at Fox News have given opponents ammunition to slow a deal that initially appeared on track to sail through.
Bradley said she received 43,000 comments on the deal, most of them part of activist campaigns to stop the merger. Around 30 letters were substantive, she said, raising potentially new evidence or commenting on the approach of communications regulator Ofcom.
“I have taken careful account of all relevant representations and Ofcom’s advice,” Bradley said. “I am now minded to refer the merger to the CMA on the grounds of genuine commitment to broadcasting standards.”
Bradley’s decision to overrule Ofcom on the question of broadcasting standards represents a victory for opponents of the deal such as political advocacy group Avaaz and former Labour leader Ed Miliband, who were deeply critical of Ofcom’s initial assessment of the deal and had lobbied hard for a wider probe.
Correspondence between Bradley’s department and Ofcom published Tuesday showed that many of the points raised by the deal’s opponents were directly put to the regulator and influenced Bradley’s minded-to view. She ultimately found merit in opponents’ arguments that a lack of adequate compliance procedures at Fox News cast doubt about the company’s commitment to broadcasting standards.
“It’s a great day for democracy and a bad day for Rupert Murdoch,” said Alaphia Zoyab, senior campaigner at Avaaz. “Murdoch has tried to bury the evidence on everything from phone hacking to sex scandals but this is a golden opportunity to do what Ofcom failed to, and dig up the truth.”
In separate statements, Fox and Sky said they were “disappointed” that Bradley wasn’t following Ofcom’s advice. “Nevertheless we will continue to engage with the process as the secretary of state reaches her final decision,” Sky said.
Fox said it was surprised that “after independent regulatory scrutiny and advice, and over four months to examine the case, the secretary of state is still unable to form an opinion. We urge the secretary of state to take a final decision quickly,” the company said.
Bradley has given the companies until Sept. 26 to make their case against a referral on broadcast standards.
Sky shares fell 1.6 percent to 937 pence in London, their lowest close since the deal was announced in December 2016. The stock now trades at a 13 percent discount to Fox’s offer price of 1075 pence per share. Fox declined 1.3 percent to $25.73 around midday in New York.
“The market will take the view that a completed deal is less probable now than at any stage so far,” said Alex DeGroote, a media analyst at Cenkos Securities. “It looks a 50:50 call, which is a surprise.”
James Murdoch and Fox Co-Chairman Lachlan Murdoch had previously warned that any delay would signal to other companies that the U.K. isn’t “open for business” as the country leaves the European Union. Britain is under pressure to reassure investors of the nation’s future path amid stalling Brexit talks with the EU.
Bradley will make the final decision on whether to clear the merger after considering feedback from the upcoming CMA review, which could come as late as March 2018.
At issue for the CMA would be the scope of the Murdoch family’s media influence in the U.K and Fox’s broadcasting record. On media influence, Rupert Murdoch is both co-chairman of Fox and executive chairman of News Corp., which owns the Times of London, the Sunday Times and the Sun newspapers. Adding Sky News to the mix would give the Murdoch family influence over a third of the news sources used in the U.K, according to a June report by communications watchdog Ofcom.
On broadcasting standards, the CMA would have to weigh the relevance of recent revelations of alleged misconduct at Fox News, including claims of fabricated quotes for a story and alleged instances of racial and sexual harassment. Ofcom’s initial review of the takeover found no broadcasting standards concerns given Fox’s favorable record of compliance with the U.K.’s Broadcasting Code.
The CMA has the infrastructure to do a much more thorough study than that initially conducted by Ofcom. It would likely entail hearings with Fox and Sky executives, as well as harvesting huge amounts of data from the companies, their rivals and industry bodies. The CMA is set to appoint a panel of experienced competition lawyers and industry grandees who would give their recommendation to Bradley.
“We will open an investigation once we receive a formal reference from DCMS setting out on what grounds they want us to investigate the merger,” a CMA spokesperson said. “We will publish an update at that time.”
The deal’s progress has already been set back by the upheaval of the U.K. general election, the furor over racial and sexual harassment allegations at Fox News and obstruction by the deal’s opponents.
Avaaz has challenged a review by Ofcom that found Sky would continue to be a “fit and proper” media outlet under Fox ownership. The group has further threatened Bradley with a legal challenge if she were to choose not to call for a deeper probe of Fox’s commitment to broadcasting standards.
“The direction of the political winds in the U.K. are less favorable every day with Labour rising,” said Alice Enders, head of research at Enders Analysis. “Who knows what the climate will be like by the time the CMA reports in April 2018 if not June 2018.”
The CMA referral makes it almost certain that Sky will now have to pay a special dividend of about 170 million pounds to its shareholders as the takeover won’t complete by Dec. 31. Fox, which initially said it expected the deal to be done by the end of 2017, now expects it to be done by June 30 “subject to any further delays in the decision-making process.” The U.S. company must pay a breakup fee of 200 million pounds if it isn’t completed by August 2018.
“This is a decision the Murdochs will not like,” Miliband said in Parliament. “She’s done her job today, and it’s now for the CMA to do theirs.”