The Fox-Sky deal would threaten to give Murdoch and his family too much influence over British media and should only proceed subject to concessions, the Competition and Markets Authority said in a provisional statement Tuesday.
Britain's Competition and Markets Authority (CMA), while recognizing Fox's commitment to the deal, said that the full ownership of Sky would hurt media plurality and give the Murdoch family too much control over U.K.'s public opinion.
Fox said it was "disappointed" by the ruling on media plurality, while Sky took note of the suggested remedies.
However some deal may go through as Disney is now negotiating with Murdoch's Fox to buy its film studios plus other assets, including its stake in Sky.
In November, Sky told the CMA it would review "the continued provision" of Sky News if it "unduly impeded merger and/or other corporate opportunities available in relation to Sky's broader business". This would "significantly weaken" the Murdochs' links with Sky, making concerns over media plurality "fall away".
On the bright side, the CMA kept the door open for remedial actions on Fox's side to make the deal possible.
However, on broadcasting standards grounds, the second area of investigation, the United Kingdom regulator said the deal is not likely to operate against the public interest.
"Sky News is possibly the unintended victim of this whole saga", Alex DeGroote, a media analyst at Cenkos Securities, told The National.
He says: 'The CMA does say that a remedy along the lines of what was offered in 2011, i.e. a divesture of Sky News could be appropriate. The news comes after Murdoch's Twenty-First Century Fox recently inked a deal with Disney to sell some of its assets, including its holding in the London-listed group.
It is looking at the possibility of a so-called sunset clause, which would mean that actions taken to address concerns, including blocking the deal, fall away if Disney's takeover goes through on the same terms as now planned.
The regulator's ruling is unlikely to affect Fox's forthcoming £49bn sale to Disney, which was not conditional on the Sky deal being approved.
It would be ironic if an attempt to preserve media plurality resulted in the ultimate closure of Sky News, which has provided strong competition to bigger players over for almost 30 years.
This may be perceived by many investors as putting the £10.75 per share takeover deal at risk. Sky is under pressure from new players like Amazon and Neflix and it's also faced with shelling out even more billions when the next auction for Premier League football rights closes in a few months.
Fox said it welcomed the findings and would continue to work with the CMA through to the end of the investigation.