By Jessica Toonkel, Kate Holton and Pamela Barbaglia
NEW YORK/LONDON (Reuters) - Rupert Murdoch's Twenty-First Century Fox Inc <FOXA.O> has struck a preliminary deal to buy the 61 percent of British pay-TV firm Sky Plc <SKY.L> it does not already own for around $14 billion, five years after a political scandal wrecked a previous bid.
The proposed offer of 10.75 pounds a share in cash is backed by Sky's independent directors and would strengthen the position of James Murdoch - who is both chief executive of Fox and chairman of Sky - in his 85-year-old father's media empire.
People familiar with the matter said Fox had pounced after Britain's vote to leave the European Union in June sent the pound down about 14 percent against the U.S. dollar and Sky's share price tumbling.
Owning Sky would give Fox, whose cable networks include Fox News and FX, control of a pay-TV network spanning 22 million households in Britain, Ireland, Austria, Germany and Italy.
It would also be the latest deal to marry distribution with content after AT&T Inc <T.N> announced an $85 billion bid to buy Time Warner Inc <TWX.N> earlier this year.
"Fox has always seen its 39 percent stake in Sky as an unnatural state of being and has long been trying to buy full control," a person familiar with the deal said.
"Now it was the perfect moment. With the weak pound (and lower stock price), Sky has become 40 percent cheaper and the government is supportive of almost any investment in Britain."
Rupert Murdoch's previous attempt to buy Sky through his News Corp business provoked uproar among some UK politicians, who said it would give the billionaire owner of The Sun and The Times newspapers too much control over the country's media.
That bid collapsed in 2011 when Murdoch's UK newspaper business was engulfed in a phone hacking scandal that intensified political opposition, resulted in a criminal trial and led to the closure of his News of the World tabloid.
Liberum analysts said Friday's proposal was likely to have an easier ride, partly because News Corp has now separated from Fox, which means the bidding firm no longer owns UK newspapers, and because there are no competition issues.
They also said the British government was keen to promote investment in the wake of the Brexit vote and could present the deal as a sign of confidence in the economy.
Prime Minister Theresa May met Rupert Murdoch after a visit to the United Nations in September, according to media reports.
Fox said it would reinforce Britain's standing as a top global hub for content generation and technological innovation.
Tom Watson, deputy leader of Britain's opposition Labour Party and a key critic of the Murdochs during the 2011 scandal, called on regulators to be ready to properly vet the deal - but did not oppose it outright.
"This bid has been expected since 2011," he said.
JAMES TIGHTENS GRIP
Fox's proposed bid is a 36.2 percent premium to Sky's closing share price on Thursday. It values the company at about 18.5 billion pounds ($23.2 billion) and the stake Fox does not already own at 11.25 billion pounds, according to Reuters calculations.
Martin Gilbert, a member of Sky’s board who will assess the bid as part of its independent committee, told Reuters the offer was a good premium worth presenting to shareholders.
Even so, analysts at Citi characterized the offer as a "low-ball bid," citing a fair value assessment of 13.50 pounds per share.
Sky's shares closed up 26.7 percent at around 10 pounds, while Fox's were down 1.8 percent at $28.12 at 2020 GMT.
Before Friday's surge, Sky's shares had dropped 30 percent this year in part due to concerns of an UK economic slowdown caused by Brexit.
The deal has also been made more attractive for Fox by a drop in the value of sterling, which makes it cheaper for foreign firms to buy UK assets. British tech company ARM was snapped up by Japan's SoftBank Group Corp <9984.T> in the days after the Brexit vote and shares in UK commercial broadcaster ITV <ITV.L> Plc closed up 5 percent on Friday on speculation it could be next.
Long tipped as his father's successor, James Murdoch's reappointment as chairman of Sky earlier this year reignited speculation of another bid approach by Fox.
Founded in 1989, Sky was heavily loss-making in the early years before Rupert Murdoch succeeded in his plan of using live sport as a "battering ram" to persuade Britons to adopt pay-TV.
As the home of live English Premier League soccer matches, the satellite firm grew rapidly through the 1990s before James Murdoch proved his own executive credentials by helping to build it into Europe's biggest pay-TV company.
In recent years it has also increased its focus on original drama and has struck up partnerships with U.S. studios in a bid to ward off the threat from Netflix and other online players.
But the firm has come under pressure as the price of content has soared. In Britain, where it makes most of its profit, it is locked in a battle with telecoms giant BT <BT.L> to secure the best rights, weighing on its margins.
Britain's takeover watchdog has set Fox a deadline of Jan. 6 to make a firm bid or walk away.
Deutsche Bank is acting as lead adviser to Fox while Morgan Stanley, PJT Partners and Barclays are working with Sky.
($1 = 0.7952 pounds)
(Reporting by Anya George Tharakan in Bengaluru; Additional reporting by Paul Sandle in London; Editing by Richard Chang, Mark Potter and Lisa Shumaker)