Anticipated acquisition by 21st Century Fox, Inc of Sky ...

[Pages:35]Anticipated acquisition by 21st Century Fox, Inc of Sky Plc

Summary of provisional findings

Notified: 23 January 2018

1. The Competition and Markets Authority (CMA) has provisionally found that the proposed acquisition by 21st Century Fox, Inc (Fox) of the shares of Sky plc (Sky) that it does not already own (the Transaction) may be expected to operate against the public interest taking account of the need, in relation to every different audience in the UK or in a particular area or locality of the UK, for there to be a sufficient plurality of persons with control of the media enterprises serving that audience (the media plurality consideration).

2. The CMA has provisionally found that the Transaction may not be expected to operate against the public interest taking account of the need for persons carrying on media enterprises, and for those with control of such enterprises, to have a genuine commitment to the attainment in relation to broadcasting of the standards objectives set out in section 319 of the Communications Act 2003 (the broadcasting standards consideration).

3. These are our provisional findings. We now invite any parties to make representations to us on these provisional findings. Parties should refer to our notice of provisional findings for details on how to do this.

Reference

4. On 20 September 2017, the then Secretary of State, in exercise of her powers under Article 5 of the Enterprise Act 2002 (Protection of Legitimate Interests) Order 2003 (the Order), referred the Transaction to the CMA for further investigation and report by a group of CMA panel members (the Inquiry Group).

5. In exercise of its duty under Article 6 of the Order, the CMA must decide:

(a) whether arrangements are in progress or in contemplation which, if carried into effect will result in the creation of a European relevant merger situation; and if so

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(b) whether, taking account only of the media plurality consideration and the broadcasting standards consideration concerned, the creation of that situation may be expected to operate against the public interest; and if so

(c) whether (and if so what) action should be taken by the Secretary of State for the purpose of remedying, mitigating or preventing any of the effects adverse to the public interest which may be expected to result from the creation of the European relevant merger situation concerned.

6. It is ultimately for the Secretary of State, under Article 12(2) of the Order, to decide the questions set out in the Terms of Reference following receipt of the CMA's report. However, in doing so, the Secretary of State must accept the CMA's decision on whether the Transaction amounts to a European relevant merger situation and shall, in particular, have regard to the CMA's report when making his decision about what action he may take to remedy any finding that the Transaction may be expected to operate against the public interest.

Background

The Parties

Fox

7. Fox is a Delaware corporation whose shares are listed and traded on the NASDAQ Global Select Market. Fox is a global media company providing cable network programming, TV and filmed entertainment. In the UK, Fox's principal activities involve the licensing and distribution of audiovisual works for theatrical exhibition, TV and home entertainment viewing, and the wholesale supply of TV channels. Fox currently holds approximately a 39% stake in Sky.

Sky

8. Sky is a public company whose shares are listed and traded on the London Stock Exchange. Sky is an entertainment and communications company active in a number of countries through several subsidiaries. Sky retails pay TV services on a linear and on-demand basis to residential and commercial premises in the UK, Ireland, Germany, Austria and Italy. Sky also produces a range of TV channels that it makes available to retail subscribers on its own and third party TV platforms and supplies on a wholesale basis to other retailers.

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9. Sky's portfolio of TV channels in the UK includes Sky News (a 24-hour news channel also available on free-to-air TV). As well as Sky News, Sky provides news content in the form of bulletins and articles on its website, and through social media. Sky also owns and operates Sky News Radio, which supplies news to the Independent Radio News (IRN) network of radio stations in the UK.

Related parties

10. News Corporation (News Corp) is a Delaware corporation whose shares are listed and traded on the NASDAQ Global Select Market. News Corp owns 100% of News UK and Ireland Limited (News UK, previously known as News International), which publishes The Times, The Sunday Times, The Sun and The Sun on Sunday (along with their respective websites) and owns a number of UK radio networks (including TalkSport and Virgin Radio UK).

11. The Murdoch Family Trust (MFT) is the largest shareholder of Fox and News Corp, holding approximately 39% of the voting shares in each. The principal beneficiaries of the MFT are Rupert Murdoch's six children. The MFT exercises its voting rights through its sole trustee, Cruden Financial Services LLC. Cruden Financial Services is managed by its Managing Directors, who are appointed by Rupert Murdoch, Prudence MacLeod (n?e Murdoch), Elisabeth Murdoch, Lachlan Murdoch and James Murdoch.

The Transaction

12. On 9 December 2016, Fox announced its intention to acquire the fully diluted share capital of Sky not already owned by Fox and its affiliates, increasing its existing shareholding from approximately 39%.

13. On 14 December 2017 Fox announced that it had agreed the sale to The Walt Disney Company (Disney) of certain assets including its interests in Sky (the Disney Transaction). Subject to the Transaction being completed, and if the sale to Disney completes on the terms proposed, then Disney would assume full ownership of Sky (including Sky News).

14. The Disney Transaction will itself be subject to regulatory scrutiny, its terms may be varied as a result and it is unlikely to be completed until well after our Inquiry has concluded. It is therefore uncertain whether, when or how the Disney Transaction will be completed. As Fox intends to complete the acquisition of the 61% of Sky it does not already own prior to the Disney Transaction completing, these provisional findings concern solely Fox's proposed acquisition of the shares in Sky it does not own and do not take into account the Disney Transaction.

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Rationale

15. Fox's stated rationale for the Transaction is `to achieve financial consolidation with a company in which it has held a substantial stake from the outset and that it will enable Fox to diversify its activities geographically, by acquiring a significant presence in markets where its activities in the TV sector are limited, and to diversify its sources of earnings towards more stable subscriptionbased revenues'.

Jurisdiction and counterfactual

16. We have provisionally found that arrangements are in progress or in contemplation which, if carried into effect, will result in the creation of a European relevant merger situation. This provisional finding is on the basis of Fox and Sky ceasing to be distinct enterprises within the meaning of the Enterprise Act 2002 (the Act).

17. We have also considered whether the MFT and Sky may cease to be distinct as a result of the Transaction. We have provisionally found that the MFT currently has `material influence' over Sky and, while it will have greater control over Sky after the Transaction, this will remain at the level of material influence within the meaning of the Act and not amount to `de facto' control or a `controlling interest'. This means that the MFT and Sky do not cease to be distinct within the meaning of the Act.

18. We have provisionally found that the plurality of persons with control of media enterprises prior to the Transaction and the commitment to broadcasting standards prior to the Transaction is the most likely counterfactual.

Media plurality

19. The media plurality consideration is set out in section 58(2C)(a) of the Act as:

the need, in relation to every different audience in the United Kingdom or in a particular area or locality of the United Kingdom, for there to be a sufficient plurality of persons with control of the media enterprises serving that audience.

20. The statutory question that we are required to answer is whether, taking account of the media plurality consideration, the Transaction may be expected to operate against the public interest.

21. The consideration of media plurality goes to the heart of our democratic process and as such is given particular protection in legislation. It follows from

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this that parliament attached considerable importance to the preservation of the plurality of persons with control of the media enterprises. Having due regard to this need for protection we have carefully considered how we should approach our assessment of media plurality.

Assessment framework and potential harm from loss of plurality

22. We consider that reaching a view on whether the plurality of persons with control of media enterprises is sufficient post Transaction involves assessing:

? the actual extent of the control exercised and exercisable by the MFT over Sky and Sky News following the Transaction and over News Corp currently;

? the impact of the Transaction on the existing plurality of persons with control of media enterprises serving a UK audience taking account of the increase in the extent of the MFT's control over Sky and Sky News; and

? if there is a reduction in plurality arising as a result of the Transaction, whether the plurality of persons with control of media enterprises will be sufficient following the Transaction.

23. The Act gives the CMA discretion in construing the relevant audience for the purpose of the media plurality consideration. Our provisional view is that the relevant audience is a single national audience for news and current affairs. While the Act does not require the CMA to limit its assessment of media plurality to news and current affairs, there is a broad consensus to do so and we consider that this is an appropriate and practicable approach.

24. We have taken Ofcom's definition of plurality as the starting point for our assessment. Ofcom identifies two related strands to the meaning of plurality:

? ensuring that there is a diversity in the viewpoints that are available and consumed, across and within media enterprises; and

? preventing any one media owner, or voice, having too much influence over public opinion and the political agenda.

25. Following Ofcom's definition, the first potential effect of the Transaction could be to reduce the diversity of viewpoints available to and consumed by members of the public. The specific concern is that the Transaction might reduce the independence of Sky's news and current affairs content on Sky News, and this in turn could lead to a reduction in the diversity of viewpoints across the news and current affairs offerings operated by the media

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enterprises controlled by the MFT, including Sky News, The Sun, The Sun on Sunday, The Times, and The Sunday Times.

26. Concerns about a reduction in diversity might arise, in particular, if the increased control that the MFT will have over Sky and Sky News following the Transaction means that the news and current affairs offerings of Sky News and News Corp could be aligned or pursue similar editorial positions or story selection following the Transaction. For example, the Transaction might make it more likely that Sky News and the newspapers owned by News Corp could take a similar approach on specific topics or issues, push certain stories, or downplay others. These concerns do not rely on full editorial alignment, but rather the potential for increased editorial alignment.

27. The second potential effect is that the Transaction could give the MFT greater control over Sky News, and that, in combination with its existing control over News Corp's newspaper titles, this could lead to too much influence over public opinion and the political agenda.

28. These two potential harms are closely linked. For example, if the Transaction were to increase the MFT's control over Sky News this could translate into a reduction in the diversity of viewpoints consumed by the public as a result of the MFT's increased control of Sky News and its existing control over News Corp. Equally, the increased consumption might be expected to increase the ability of the MFT to influence public opinion and the political agenda.

29. To assess these two potential effects, we have built on Ofcom's media plurality measurement framework. We have considered both quantitative and qualitative measures covering availability, consumption, impact and contextual factors. We note that Ofcom is clear that any assessment of plurality should not be focused solely on quantitative metrics but must instead take account of qualitative factors and recognise the complexity of assessing the plurality of news provision. We agree with this. We have sought to understand how practical observations and other qualitative assessments presented to us should be interpreted alongside quantitative evidence.

30. Our assessment requires us to consider whether, if there is a reduction in plurality arising as a result of the Transaction, plurality nonetheless remains sufficient. The media plurality consideration was introduced into the Act on the basis that competition law may not be sufficient to safeguard a sufficient level of plurality.

31. Given that parliament attached considerable importance to the preservation of plurality of persons with control of media enterprises, in order to support a healthy and informed democracy, we consider that concerns in relation to the

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sufficiency of plurality may arise at lower levels of concentration than would be considered problematic in the context of a competition assessment.

32. We note that the Act does not provide a definition or measure of what constitutes sufficient plurality or a sufficient plurality of persons with control of media enterprises. Furthermore, there is limited existing guidance and Ofcom's measurement framework does not establish a benchmark for a `sufficient' level of plurality.

33. We consider that our assessment needs to be undertaken by reference to the current market and political context. We think that the assessment of sufficiency in this context needs to take account of two key factors:

? first, the MFT's position following the Transaction, as the person with control of News Corp and increased control of Sky and Sky News, in relation to the two core elements of plurality ? diversity of viewpoints consumed, and ability to influence public opinion and the political agenda. In this context, we have considered the availability, consumption and impact of the viewpoints consumed by audiences in the UK over which the MFT has control; and the strength of the MFT's influence over public opinion and the political agenda; and

? second, the wider context of other media enterprises serving the relevant audience. In this context we have considered the alternative viewpoints provided by other media enterprises, and the extent to which an increase in the degree of influence of the MFT might be mitigated or moderated by other media enterprises.

The MFT's control over Sky

34. In line with the Court of Appeal's 2010 judgment in relation to the acquisition by British Sky Broadcasting Group (BSkyB, now Sky) of 17.9% of the shares in ITV (BSkyB/ITV), we have carried out a qualitative assessment of the actual extent of the control exercised and exercisable by the MFT over Sky and News Corp. We have therefore not assumed that the MFT, Fox, Sky and News Corp are to be treated as a single entity following the Transaction.

35. We consider that the extent of control exercisable by the MFT over Sky and Sky News currently and the extent of control exercisable by the MFT post Transaction are most relevant to our assessment, and that this approach is consistent with the Court of Appeal's judgment. Furthermore, this approach reflects the purpose and content of the media plurality consideration, which seeks to guard against the potentially harmful effects of the control of media enterprises being overly concentrated in the hands of a limited number of

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persons and the fact that it would be a concern for any one person to control too much of the media.

36. It is relevant that an assessment of the kind we are currently carrying out can only be triggered by an intervention in relation to a merger. Accordingly, any assessment of the control that will be exercisable post Transaction must take into account the ability of the MFT to increase the degree of control actually exercised over Sky and Sky News in the future. Although the way the MFT has exercised control over Sky and Sky News prior to the Transaction is informative, it is not determinative of its future behaviour.

37. We consider the approach adopted by the legislation reflects the fact that:

? parliament attached considerable importance to the preservation of sufficient plurality of media controllers in order to avoid an over concentration of media enterprises in the hands of a limited number of persons;

? sufficiency is not subject to continual regulatory scrutiny; and

? if sufficiency of plurality is lost, it may be difficult or impossible to restore.

38. Our provisional view is that the MFT and Rupert, Lachlan and James Murdoch should be considered to act together for the purpose of our assessment of the extent of control exercised and exercisable by the MFT over Fox, Sky and News Corp. This is based on the close association between Rupert, Lachlan and James Murdoch as family members and their close association with the MFT.

39. In terms of the extent of control currently exercised and exercisable by the MFT over each of Fox, News Corp and Sky, we have provisionally found that:

? the MFT exercises a significant degree of formal control over Fox. This control is exercised primarily through its shareholding and the presence of James Murdoch as CEO and Rupert and Lachlan Murdoch as Executive Co-chairmen. We also consider that the MFT's control over Fox is further enhanced by relationships between certain directors of Fox and either the MFT or members of the Murdoch family (or both);

? the MFT exercises a significant degree of formal control over News Corp. This control is exercised primarily through its shareholding and the presence of Rupert and Lachlan Murdoch as Executive Co-chairmen, with James Murdoch as another director. In addition, the MFT through Rupert Murdoch's historic relationship with the News UK newspapers exercises

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