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Analysts: Fox faces better regulatory environment in latest move for Sky

The move for full control of Sky plc by 21st Century Fox Inc. is raising some eyebrows but likely will be successful, according to analysts.

Fox's move to acquire the remaining shares of the European pay TV giant that it does not already own comes several years after its first attempt in 2010. The announcement, which values Sky at 12x EV/EBITDA, led to a spike in its London-traded shares by as much as 32%. Sky's share price has pulled back since, ending the day 2.8% lower than its closing price the day of the announcement.

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Attracting global investment in the Brexit aftermath is high on the agenda of Britain's newly appointed government, led by Theresa May, who held a private meeting with Fox Chairman Rupert Murdoch in September of this year.

Yet owning Sky would give the company an even more dominant position in British media. As a result, the deal has already come under political pressure. A number of politicians, including Liberal Democrat Vince Cable and former Labour Party leader Ed Miliband, have called for investigations into Fox's proposal.

Media analysts, however, believe the bid is unlikely to encounter significant regulatory challenges in the post-Brexit landscape.

"We do not expect the bid to be blocked on regulatory [or] political grounds," said Ian Whittaker, a London-based media analyst at Liberum. "We doubt [the government] would want to veto what could be viewed as a major sign of confidence in the U.K. market."

While Fox will still need to clear some hurdles, Hargreaves Lansdown equity analyst George Salmon believes Fox's ability to secure approval from Sky directors for its offer price shows market conditions may be less "hostile" this time around.

The key difference between the 2010 bid from Fox's sister company News Corp. and the current proposal is the new combination will not comprise the same assets. Murdoch's first attempt to take over the pay TV giant would have combined 40% of the newspaper market in the U.K. and around 35% of the TV market, noted Claire Enders, of London-based research firm Enders Analysis. News Corp. was also under fire for alleged breaches in journalistic integrity at the time.

Fox and News Corp. have since split into separately traded companies.

SNL Image"It was a different structure… a different historical context," Enders told BBC Radio on Dec. 10. "I think it's very likely that even if there is a plurality investigation that this will go through."

In the absence of a regulatory investigation into the deal, Fox could close the deal "within six months," Enders said.

The Sterling slump in the months following Brexit, combined with top-line pressure on Sky from streaming services, creates the "perfect storm" for such a deal, said S&P Global Market Intelligence analyst John-Paul O'Sullivan.

The weaker pound means the deal will cost Fox significantly less than it would have before the Brexit referendum, noted Salmon. Also, Sky offers Fox geographic diversity away from the stressed U.S. TV market, he said.

Further synergies for Fox include negotiations for global sports rights and the potential for data sharing between distribution, packaging and production arms, according to Brian Wieser, senior research analyst at Pivotal. He also argued Fox's U.S. strategy could benefit from Sky's OTT distribution strategies in Europe.

Fox's offer represents a 40% share price premium to the closing price of Dec. 6 and a 36% premium to Sky's close on Dec. 8. While the premium is still significant, Sky's stock price has seen a notable decline year-to-date and Sterling is 15% cheaper than it was Jan. 1, Steve Cahall, a media analyst at RBC Capital Markets said in a Dec. 11 note.

"Investors are anxious to better understand the strategic prospects," said Cahall.