By Stu Woo and Keach Hagey
LONDON -- Trying once again to strengthen control of its media empire on both sides of the Atlantic, the Murdoch family's 21st Century Fox Inc. on Thursday formally submitted a roughly $14.6 billion offer to buy the 61% of British pay-TV giant Sky PLC it doesn't already own.
Fox offered GBP10.75 ($13.41) a share for the Sky stake, valuing the whole of Sky around $23 billion.
The offer price is unchanged from the deal's previously disclosed terms, but Fox said it would pursue the tie-up through a so-called scheme of arrangement rather than as a straightforward tender offer.
That type of merger agreement allows an acquirer to more quickly purchase 100% of its target but could be harder to pull off because Fox's stake will be excluded from voting on the transaction. By contrast, a tender offer could have allowed Fox to obtain majority control of Sky more quickly but might have delayed its path to 100% ownership, meaning Fox would have had to deal with minority shareholders for some time.
"The strategic rationale for this combination is clear," said Lachlan Murdoch, co-executive chairman of 21st Century Fox and billionaire Rupert Murdoch's eldest son, on a call with analysts on Thursday. "It creates a global leader in vertically integrated distribution, it enhances our sports and entertainment scale, and gives us leading direct-to-consumer capabilities and technologies."
On the same call, his brother, James Murdoch, who serves as chief executive of 21st Century Fox and chairman of Sky, offered an argument for such vertical integration that echoed the one recently put forth by AT&T Inc. and Time Warner Inc. for their proposed merger: Today's television marketplace requires such integration for the sake of innovation.
He said Sky has been a leader in the kinds of innovation -- particularly around customer experience, content discovery and monetization models -- that are increasingly important as content delivery becomes more digital and the consumer has more control.
Another benefit of the Sky deal would be to create a more stable mix of revenue streams between advertising, distribution and licensing.
Fox executives said the deal would be financially advantageous, boosting earnings per share growth at a "double digit" percentage above what it would be without the deal in fiscal 2018 and 2019.
The two companies, which disclosed a tentative agreement on Dec. 9, now must withstand a gauntlet of scrutiny from politicians, regulators and minority shareholders to seal the deal.
Sky shares initially fell in afternoon London trading but recently were up less than 1% at GBP9.88 The company's stock had soared when deal talks were first disclosed but have remained short of the offer price.
Some Sky investors, who must vote to approve the proposal, have voiced concerns over whether Fox's bid was fair to all stakeholders, given the Fox-Sky relationship.
Richard Marwood, senior fund manager at Royal London Asset Management, which said it owns 0.36% of Sky, urged Sky's independent directors to share more of the financial advice on which they based their decision to agree to sell.
"Such disclosure would help shareholders assess the fairness of the offer and give greater confidence in the independence of the committee in the bid process," he said.
The U.K. Parliament can refer the deal to the country's telecommunications regulator, which can examine whether the merger would give a media owner too much influence.
The elder Mr. Murdoch and his family are major stakeholders in Fox as well as News Corp, publisher of The Wall Street Journal and three of Britain's biggest newspapers: the Sun, the Times and the Sunday Times.
Fox Class A shares rose a fraction to $28.14 in recent New York trading, after tumbling earlier this week on the initial news of the deal.
Fox plans to finance the deal through a combination of balance sheet cash and roughly $10 billion in debt, which would bring the combined company's ratio of debt to adjusted earnings to more than four times, well above the company's target of staying below three times.
Fox Chief Financial Officer John Nallen reiterated the company's commitment to keeping its debt investment grade, and said the increasedfree cash flow from the combined company "will result in rapid deleveraging back to our target leverage range."
The prospects of such a merger have improved since 2011, when Fox's predecessor abandoned an earlier bid to buy Sky amid a national scandal in the U.K. Revelations that one of its British newspapers had illegally accessed the voice mails of politicians and crime victims sparked anger from the public and from politicians, who also questioned whether the proposal would put too much media power into few hands.
The anger has faded. The elder Mr. Murdoch moved quickly to shut down the implicated tabloid and, in 2013, split the company into two: 21st Century Fox, which comprises a studio, TV stations and networks, and News Corp, which owns newspapers as well as HarperCollins Publishers.
Fox is expected to make the case that since its predecessor spun off its publishing assets in 2013, Fox owns no British media assets besides its existing minority position in Sky, and thus a combination won't affect diversity in media ownership.
European Union regulators can also assess the deal, though they approved a similar proposal between Fox's predecessor and Sky in 2010.
Fox said it expects to complete the deal by the end of 2017. If the deal isn't completed by then, Sky shareholders will get a special dividend of 10 pence a share, which will be paid in 2018.
On the call, James Murdoch said that while he expects a regulatory process, "we believe this passes regulatory muster." He added that "no meaningful concessions will need to be made."
Write to Stu Woo at Stu.Woo@wsj.com and Keach Hagey at firstname.lastname@example.org
(END) Dow Jones Newswires
December 15, 2016 12:20 ET (17:20 GMT)
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