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Fox CEO Covets Sky’s Technology, Infrastructure in $23.2 Billion Takeover Bid

Variety logo Variety 12/12/2016 Cynthia Littleton
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For 21st Century Fox, the appeal of buying up the remaining 61% of European pay TV powerhouse Sky is easy to see.

The consolidation of Sky under the Fox umbrella would be a boon to earnings and give the conglom control of a growing company that is a natural strategic fit with the rest of its portfolio. On Friday, Sky and Fox revealed they have set preliminary terms of a deal for Fox, which at present owns 39.1% of Sky, to scoop up the remainder of the satcaster in a cash transaction valued at $23.2 billion (although both sides cautioned that key deal terms are still being hammered out).

But there’s another reason why Fox CEO James Murdoch is so keen to get his hands on the company he headed as CEO from 2003 to 2007, followed by a run as chairman through 2012. Sky’s technological infrastructure and the easy-to-use navigational system it has developed for direct-to-consumer offerings such as its Sky Go streaming platform could have applications for Fox’s U.S.-based network and studio operations.

Murdoch has made no secret of his interest in expanding Fox’s capabilities in the direct-to-consumer arena. Fox Networks Group, home of its U.S. and international channels, last year recruited former Sky Deutschland CEO Brian Sullivan to serve as president of digital with a broad charter to steer Fox’s direct-to-consumer strategy. Improving Fox’s ability to reach consumers directly with programming and advertising innovations has been a top priority for Murdoch since he took the CEO reins from his father, Rupert Murdoch, last year.

For now, in the U.S., Fox’s focus remains on working within the existing MVPD structure to improve the user experience for Fox-branded authenticated streaming and VOD offerings. It’s also making sure that Fox has broad rights to the programming its channels carry in order to avoid frustrating consumers by making some but not all programs available on alternate platforms.

“I find that simply outsourcing and washing your hands of the customer experience is a pretty dangerous place to be,” Murdoch said in September during his Q&A at Goldman Sachs’ Communicopia conference. “That doesn’t mean that we need to be direct-to-customer directly ourselves, but it certainly means we have to focus more on what are the behaviors in our business around licensing, for example, that create a bad user experience.”

Murdoch’s focus on user-friendly navigation and broad access to programming echoes the pitch that AT&T chief Randall Stephenson and Time Warner CEO Jeff Bewkes have been making in selling their pending $85.4 billion merger. The old-guard MVPDs have been too slow to innovate on alternative forms of distribution, creating the opening that allowed Netflix and others to prosper.

Murdoch in recent months has pointed to the Sky Go platform as a model for the future, even as he hedges his bets on whether Fox will try to go it alone with a direct-to-consumer channel offering anytime soon.

“We’re very focused on creating more capability around that user experience in a similar way that we did with the Skys, with Sky Go, where over half of Sky’s customers actively use the over-the-top streaming product to consume the video … and it’s a very different user experience,” he said earlier this month at UBS’ Global Media and Communications conference. “Whether or not we independently price our products … shouldn’t imply that we’re not investing and creating capability to create a much better user experience anyway for the 90 million or 87 million households who can authenticate our products and actually consume them directly.”

In the wake of Friday’s announcement, RBC Capital Markets analyst Steven Cahall noted that the pursuit of Sky should calm investor worries that Fox would jump into the M&A fray with a more costly or risky acquisition target. Sky, launched by Rupert Murdoch in 1989, is already a known quantity to Fox investors.

The preliminary deal was generally well received by Fox watchers, although some noted that it will hike up its leverage ratio. Michael Nathanson of MoffettNathanson Research downgraded Fox shares to neutral and described it as “disappointing from a strategic and timing perspective.” But others were more positive, including Brian Wieser of Pivotal Research who held Fox’s buy rating and said he was “positively disposed towards the combination at a strategic level.”

In trading Monday, however, Fox’s shares dropped more than 6% on a down day for the NASDAQ overall.

Fox was close to buying up the rest of Sky in 2011 before the political drama of the phone-hacking scandal at News Corp.‘s U.K. newspapers up-ended the deal. At the time, News Corp. had won conditional approval of a $13 billion bid to buy out what was then British Sky Broadcasting. But the outrage that erupted against News Corp. in the summer of 2011 about phone-hacking of politicians and celebrities made completion of the deal untenable and the company that was then News Corp. pulled its bid. The furor and public investigations forced James Murdoch to resign as Sky chairman.

Five years later, Fox and Sky are very different companies. The BSkyB debacle gave impetus to the decision by the Murdochs to split News Corp. into two companies, one housing the media and entertainment assets (21st Century Fox), and one for the publishing assets (News Corp.). Wall Streeters were aghast that the political problems generated at the newspaper division — a small contributor to the bottom line of the Murdoch empire — cost the company the chance to consolidate a far more strategic asset.

Sky, meanwhile, has vastly expanded into a pan-European outfit through its 2014 merger with the Murdoch-controlled Sky Italia and by buying up a majority interest in Sky Deutschland. At present, Sky serves 22 million subscribers across the U.K., Ireland, Germany, Austria and Italy.

Sky provides a cable-like mix of channel packages, broadband and mobile service (in the U.K. and Ireland) as well as its proprietary news, sports and entertainment channels. The Sky Atlantic channel launched in 2011 is the home of HBO and Showtime programming in Sky markets, and Sky Atlantic has become active in fielding its own original series.

During Fox’s fiscal first quarter earnings call last month, Murdoch praised Sky for crafting linear and online platforms that offer “a user experience that’s really second to none globally.” And he has been blunt about the shortcomings on this side of the pond of most traditional MVPDs. Fox and other major cable programmers are under increasing financial pressure from the threat of losing subscription revenue as consumers drop the old-school cable bundle for cheaper alternatives.

“The absence of a great customer experience amongst the existing MVPDs, with the exception probably of (Comcast’s) X1 right now, has led to a lack of competitiveness for them and those existing MVPDs not performing as well as they could in terms of total subscriber growth,” Murdoch said at the Communicopia conference.

At a time when the distribution of programs and channels is in flux, Murdoch sees a ballast not only in the European-centric earnings that Sky would bring in but also in technological know-how and experience that could be increasingly vital to Fox’s future.

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