The power of media companies to shape societal dialogue and act as gatekeepers of content is coming under increased scrutiny. This is starting to impact the industry as demonstrated in the challenges American media giant Twenty-First Century Fox (Fox) is facing in its proposed GBP 11.7 billion (USD 15 billion) takeover of UK broadcaster Sky plc.
Mergers in the media and communications sector are nothing new, with PwC estimating deals between 2011 and H2 2016 to be valued in excess of USD 624 billion. A driving force behind this M&A activity is vertical integration and geographic expansion. With the proposed merger between Fox and Sky we are, however, increasingly seeing how concerns over content governance come into play.
News Providers' UK Reach and the Combined Power of Sky, Fox and News Corp (in Percentages)
The Review of the Fox Sky Takeover Deal
Since March 2017, UK communications regulator OFCOM, Culture Secretary Karen Bradley, and the Department for Culture, Media and Sport have been reviewing the proposed takeover of Sky on the grounds of upholding media plurality (independence). The review took longer than expected as the deal was subject to stricter media regulation in the UK, and faced substantial criticism from investors, civil society groups and citizens. On 14 September 2017, concerns over Fox’s broadcasting record, content governance, sexual harassment scandal in the US, and corporate governance structure (lead by the Murdoch family) have motivated a full review of Fox’s broadcasting standards by the UK Competitions Market Authority (CMA). This is creating a high degree of uncertainty regarding the takeover’s outcome. On 12 September 2017, Bradley expressly stated that she was not satisfied by Fox’s assurances that Sky’s high broadcasting standards would be maintained.
Regulators and stakeholders are increasingly concerned over media mergers because of the disparity in the way these companies oversee broadcast content, like news programming, that informs public opinion. Haunted by the phone hacking scandal at former parent company News Corp in 2011, Fox is no stranger to controversy. It has repeatedly breached media licensing agreements and OFCOM broadcasting rules and its management continues to face allegations of biased news coverage.
Content Governance Concerns
A takeover by Fox could undermine the culture of strong content governance at Sky, justifying stakeholder opposition. When comparing Fox and Sky, our research shows substantive differences in the way they govern content (see graph). We measured content governance by combining our indicators for Editorial Guidelines, which assesses commitments overseeing content creation and distribution, and Media Ethics Programs, which evaluates initiatives that support principles of content integrity.
Content Governance: Fox vs Sky
Source: Sustainalytics Research (content governance is a composite indicator consisting of the indicators for Editorial Guidance and Media Ethics Programs)
As shown in the graph above, concerns over content governance may be justified, contributing to the uncertainty regarding the CMA’s full review of the deal, which will include an analysis of the impact on broadcasting standards. This uncertainty is creating risk for investors who are seeing increased volatility in Sky’s stock price and potential stock price declines. In addition, compensation payments to shareholders are predicated on closing deals at agreed upon share values. Fox agreed to complete the deal with Sky in 2017 or pay approximately GBP 172 million to Sky shareholders. An additional GBP 200 million payment will be due to Sky shareholders if the deal falls through completely.
Enterprise value can also be challenged after a merger, with technology, media and telecom companies experiencing the most disappointing ROI two years after a merger is completed. Finally, large mergers, like this one, have often resulted in the buyer’s credit score being downgraded.
The proposed merger between Fox and Sky highlights the importance of content governance as a material ESG issue investors need to consider in light of the growing trend of mergers and acquisitions in the sector. This need for strong editorial standards is set to become even more relevant as we enter an era of proliferating misinformation.
Content governance is one of many ESG issues that could affect the success of M&A transactions. Please see our ESG Compatibility: A Hidden Success Factors in M&A Transactions for a more comprehensive overview.
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