Britain asked on Monday for fresh regulatory advice over the bid by Rupert Murdoch's News Corp to buy BSkyB, signaling it could be looking for a way out of approving the deal while a phone hacking scandal rages.
Shares in the British satellite firm slumped over 7 percent on Monday, after a similar fall on Friday, as politicians added to the pressure by demanding the government delay the bid and send it for a longer investigation at the Competition Commission.
We believe the deal is all but dead, Panmure Gordon analyst Alex DeGroote said.
On Friday we cut our probability of the deal going ahead to 50:50 ('evens') from 90:10 in favor. This seems very optimistic now. Our new assessment is 10:90 in favor.
News Corp had secured initial government backing for the bid by promising to spin off BSkyB's influential Sky News channel in response to claims the deal would give Rupert Murdoch too much influence over public opinion.
News Corp would however have retained a 39 percent holding in the new company and provided much of its revenue through a deal to carry the channel on the BSkyB platform, prompting critics to question how much editorial independence the channel would really have.
The request for further information from regulators means the government may now have room to refer the deal to the Competition Commission for a full investigation which could last up to a year, taking pressure off Prime Minister David Cameron who is himself under fire for his close ties to Murdoch.
We think there is a very strong chance the News Corp bid for BSkyB gets completely scrapped, Liberum analyst Ian Whittaker said in a note.
While the government has emphasized that the due regulatory process has to be followed and there has been commentary News Corp would head to the courts if its bid was blocked, this has now become a completely politically-driven issue.
It will be hard for the government to approve the bid, either now or at some point in the future.
The Department of Culture, Media and Sport is to write to Ofcom and the Office of Fair Trading on Monday to ask whether the original submissions around the deal should change following the phone hacking scandal that has damaged the reputation of the media conglomerate.
The letter is expected to ask if the undertakings given by News Corp over Sky News are still acceptable in light of the hacking scandal, which resulted in Murdoch closing the tabloid at the center of the problem.
It will also ask if that closure affects media plurality, or the number of media voices, in Britain, and to inform the government of any opinion it takes on whether News Corp is a 'fit and proper' holder of a broadcast license.
Several analysts said they still expected a deal to go through eventually, while others said it was now too hard to call as the deal is overtaken by political events.
Citi analyst Thomas Singlehurst said a potential BSkyB/News Corp merger no longer looked as certain as thought a week ago.
At the same time, the actions taken to date by News Corp suggest that its ambition to own 100 percent of BSkyB is undimmed, he said. Barring the most dramatic of outcomes from the criminal investigations, we still see it as a matter of 'when' not 'if'.
Analyst Claudio Aspesi at Bernstein said the chance of the deal going through was now less than 50 percent, although he said a deal could be resumed at a later date if they could prove the problem was confined to the newspaper arm of the company.
What I worry about is that questions will now shift to What did James (Murdoch) and Rupert know, and when did they know it?, he told Reuters.
Unless this is cleared very soon, the deal will fall through, because the government will be under pressure to distance itself from the Murdoch family.
BSkyB shares were trading between 550 and 600 pence before News Corp made its initial approach in June last year. They then spiked over 700 pence as the two sides revealed that News Corp had offered 700 pence and BSkyB independent directors were insisting on an offer of over 800 pence.
On Monday they were trading down 7.3 percent to 695 pence.
Chief Secretary to the Treasury Danny Alexander said the Department of Culture, Media and Sport was writing to the regulators because it needed the most up to date information as it made its final decision on the deal.
It is right in the light of ... all the developing issues (that) Ofcom have the opportunity to come forward with fresh advice, he told Sky News.
(Reporting by Kate Holton; Editing by Jon Boyle)