LONDON, Feb 2 (Reuters) - Rupert Murdoch's Fox is hoping the creation of an independent editorial board to protect the news channel at bid target Sky will satisfy regulators and allow it to finally take control of the European pay-TV group.
Britain's competition regulator told Twenty-First Century Fox last month that Murdoch's near eight-year, $15.7 billion pursuit of Sky would be blocked unless a way is found to prevent the media mogul from influencing Sky News after a deal.
Fox had earlier offered to create an editorial board with a majority of independent directors. People familiar with the matter, lawyers and investors believe a stronger mechanism to guarantee independence should be enough to gain approval.
The takeover is being closely watched in the United States where Fox has agreed to sell most of its assets including Sky to Walt Disney Co, which wants to buy all of Sky in the deal and not just the 39 percent that Fox already owns.
Fox is likely to have taken encouragement from a comment from the regulator that given that Fox may not own Sky for long, it will be willing to accept the most cost-effective solution.
"Fox are still confident they can get the deal done," a person familiar with the situation said. "They're working on new suggestions for the remedies."
As Britain's biggest owner of national newspapers, every move by Murdoch is scrutinised by his political allies and enemies alike. Britain's competition regulator worries that a deal to own all of Sky News would give him too much sway over public opinion.
Prime Minister Theresa May's government has the final say on the deal, but will have to stick to the regulator's advice or face possible legal action.
Lawyers and consultants think Fox can land Sky by offering a fully independent board for Sky News and long-term funding, preventing it from having to make the more costly option of spinning off the channel or selling it completely.
Sky, Europe's leading pay-TV provider in 23 million homes across Britain, Ireland, Austria, Germany and Italy, has kept up the pressure by warning it could close the loss-making but award-winning channel if it prevented a takeover.
Sky News launched in 1989 when Murdoch, having shaken up the newspaper market, sought to smash the dominance of the BBC and commercial network ITV by launching four channels as part of a new paid-for satellite service.
The 24-hour channel, the first in Britain to follow in the footsteps of global pioneer CNN, immediately gave the fledgling network visibility, and it has punched above its weight in terms of influence ever since.
Watched closely in newsrooms, boardrooms and the offices of state, Sky News is a politically neutral outlet that has forced the taxpayer-funded BBC to up its game in rolling news.
The challenge is to find a system that protects Sky News' independence without forcing so much separation that it puts the channel into financial jeopardy. Murdoch has funded Sky News through nearly 30 years of losses.
It has an average weekly reach of 4.4 million viewers, or average share of TV viewing of 0.56 percent, according to BARB ratings for the week ended Jan. 21. It reaches millions more through its online and radio output.
In its provisional findings, the competition regulator suggested a system where independent directors form an Editorial Board for Sky News, perhaps appointed by media regulator Ofcom.
The Board would appoint the head of Sky News, who would in turn retain editorial control.
The regulator has asked interested parties to respond.
"It is a difficult circle to square," said a competition lawyer who is familiar with the case. "It has to be independent enough to still be a viable independent voice, but not so independent that it is left to wither away.
"But it can be done."
Were the government and regulator to decide that the proposal does not go far enough, they could insist that in order to complete the deal, Fox should spin off or sell Sky News.
In 2011, when Murdoch last tried and failed to buy Sky, he offered to put the news outlet into a new company with shares given to existing Sky shareholders. Reviewing the different options, the regulator has noted that Sky News has never previously constituted a standalone business, perhaps indicating its fears about how it would fare.
The regulator has also acknowledged that Sky could next year be owned by Disney, a business that doesn't have any news outlets in Britain, meaning its concerns would lapse.
Fox is now working on a response and is likely to address the concerns raised by the regulator about its earlier plan, including how the board members would be appointed and whether a majority of independents would be enough.
Twenty-First Century Fox and Sky declined to comment.
"As long as Fox is willing to submit the right remedies, it will get done," said one hedge fund manager with investments in both companies.
But the lengthy process has caused agitation among some shareholders, who say Fox should now stump up more than the headline 10.75 pounds per share.
"Basically, here is Fox being bought-out on 12 times cashflow," Crispin Odey, whose hedge fund is a 0.9 percent investor in Sky, said in December. "If we (Sky shareholders) were being sold on 12 times cashflow we'd be at 12.30 pounds."
Activist investor Elliott Management Corp, founded by Paul Singer, has also built a stake in Sky of 1.29 percent.
One London-based adviser said: "An effective ring-fencing of Sky News in some form should solve all the concerns of the regulator. Once that is done, Elliott is likely to push for a better price."
Media Secretary Matt Hancock has said he will rule on the deal by June 14.
If approved, it will go to a vote of Sky independent shareholders, paving the way for the 86-year-old Murdoch to finally get his hands on a company he has long coveted. (Additional reporting by Maiya Keidan; Editing by Keith Weir)