Fox, which already owns 39 per cent of Sky, has made a £10.75-per-share offer, worth £11.7bn. The approach values the whole of the UK media giant at £18.5bn.
Fox said it would be using a scheme of arrangement, meaning it would need 75 per cent approval from shareholders in value and over half of them in number.
Within hours of the deal being announced, both Labour and the Liberal Democrats called for the government to subject the transaction to regulatory scrutiny.
Shares in Sky initially jumped on the announcement but fell minutes later. They are currently trading well below the current offer price, around £9.85.
The US company also made a number of investment commitments, which are not legally binding, in the offer document, including retaining Sky's UK headquarters and its news output.
A previous takeover approach for Sky failed in 2011, at the height of the News of the World phone-hacking scandal and amid political and regulatory scrutiny.
The companies announced they had reached a deal in principle at £10.75 per share last Friday.
And Fox said today it had formally agreed to the deal with Sky. The US company said it expects the transaction to close by the end of next year.
“As the founding shareholder of Sky, we are proud to have participated in its growth and development," Fox said in a statement.
The strategic rationale for this combination is clear. It creates a global leader in content creation and distribution, enhances our sports and entertainment scale, and gives us unique and leading direct-to-consumer capabilities and technologies.
It adds the strength of the Sky brand to our portfolio, including the Fox, National Geographic and Star brands.
Certain shareholders and politicians have been critical of the deal this week, after the companies revealed they were in talks last Friday.
Standard Life and Jupiter Asset Management, who own small holdings in Sky, suggested the £10.75-per-share price undervalued the broadcaster. M&G, meanwhile, indicated it was satisfied with the value.
Royal London Asset Management, meanwhile, raised concerns about the fact Sky's chairman, James Murdoch, is the chief executive of Fox.
Royal London senior fund manager Richard Marwood said today:
Following the £10.75 offer for Sky from 21st Century Fox, we would urge the independent committee of Sky directors, who recommended that shareholders accept the offer, to share more information on the independent financial advice that they based their agreement on. 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.
However, Sky said an independent committee - led by Martin Gilbert, chief executive of Aberdeen Asset Management and deputy chairman of Sky - was considering the bid.
Gilbert said today:
The independent committee unanimously agreed that we have a proposal that we can put to Sky shareholders and recommend.
The independent committee also notes 21st Century Fox’s track record in growing businesses and its ability to continue the development of Sky across Europe, in a world where entertainment and distribution are converging.
21st Century Fox’s ownership will support the delivery of Sky’s strategy and long-term growth, ensuring that it remains at the forefront of Europe’s creative industries.
The deal was also met with political opposition, notably from former business secretary Vince Cable and former Labour leader Ed Miliband.
Cable said today:
This deal may be acceptable to a majority of shareholders but that doesn't mean it is in the public interest.
The minister [culture secretary Karen Bradley] should now call in the takeover and start the process of independent investigation into the impact on plurality and competition. The takeover would strengthen even further the grip of a major media owner on UK media.
Tom Watson, Labour's shadow culture secretary, said:
The secretary of state must refer the bid to Ofcom, to assess whether it would result in too much media power being concentrated in too few hands, and whether Rupert and James Murdoch are ‘fit and proper persons’ to run a broadcaster...
Fox is attempting to finalise this deal as the Christmas break approaches - but there is still time for the Government to intervene. They must express their view to Parliament before Christmas.
When she stood on the steps of Downing Street this summer, the prime minister said to the people of this country that 'When we take the big calls, we’ll think not of the powerful, but you’. This is a big call. The government needs to decide whose side it’s on.
The National Union of Journalists (NUJ) also waded in, saying the deal should be blocked and claiming “Most of the British public do not believe that Rupert Murdoch is a fit and proper person” to own Sky.
NUJ general secretary Michelle Stanistreet said:
Most of the British public do not believe that Rupert Murdoch is a fit and proper person to run BskyB, and whilst there are clear reasons of corporate opportunism that drive his desire to finally clinch this deal, there’s no benefit for the public in this takeover being given the green light. We need greater plurality in our media, not an ever-further toxic consolidation of power and control.
The Department for Culture, Media and Sport declined to comment.
Behind the deal
Boutique investment bank PJT Partners were advising Sky on the deal alongside Morgan Stanley and Barclays.
The PJT team was led by Simon Lyons and Scott Matlock, a partner at the firm who worked on Rupert Murdoch’s previous attempt to takeover Sky in 2010. Owain Parry also worked for PJT on the deal.
Also acting for Sky were a Morgan Stanley team comprising Simon Smith, Laurence Hopkins, Anthony Zammit and Ben Grindley. Mark Astaire, Richard Taylor, Daniel Ross and Hugh Moran for Barclays.
Deutsche Bank was lead financial adviser to 21st Century Fox. Gavin Deane, Deutsche’s London-based co-head of TMT, worked on the deal with head of UK M&A James Arculus, Jon Krissel and Mathew Mathew.
Also on the buy-side were Blair Effron, David Cohen, James Hartop and Tim Hannan of Centerview Partners; John Waldron, Mike Smith, Mark Sorrell and Owain Evans of Goldman Sachs; and Jennifer Nason, Hugo Baring, Marco Caggiano and Dwayne Lysaght of JP Morgan.