To the surprise of sports fans, politicians and shareholders alike, Stephen Byers, the Trade and Industry Secretary, halted the pounds 623m takeover bid after the Monopolies and Mergers Commission (MMC) ruled it anti-competitive, saying it would have an adverse effect on the wider football industry.
"Under almost all scenarios considered by the MMC, the merger would increase the market power which BSkyB already has as a provider of sports premium channels," Mr Byers said.
The ruling undermines BSkyB's carefully thought-out strategy at a time when the company is investing heavily in its new digital satellite service.
The supporters' groups who have opposed the deal since it was announced last September were jubilant. "The most remarkable thing is that a politician has at last stood up to Rupert Murdoch," said Michael Crick, a broadcaster, and founder of the Shareholders United Against Murdoch group.
BSkyB felt it had addressed the main objection to the takeover - that Manchester United would pass information about bids for television rights from rival broadcasters to its new parent - by agreeing that the club would withdraw from the talks.
"We said at the outset that Manchester United had one vote in 20," said Vic Wakeling, managing director of Sky Sports. "We have then said, if people are concerned about this, we will agree to stand down during any TV contract talks, so we can't see why there would be a competition issue."
BSkyB and United were disappointed but said the decision was not fatal. Mark Booth, BSkyB's chief executive, said: "This is a bad ruling for British football clubs who will have to compete in Europe against clubs who are backed by successful media companies."
Sources in the Murdoch camp said last night its reaction was one of "disbelief rather than anger". Their surprise was echoed by legal experts who had concluded there were few concrete reasons for blocking the deal.
Observers were also surprised at the tone of the 254-page report, which was compiled after an investigation lasting four and a half months. The report is highly suspicious of BSkyB and United, concluding that promises offered by the two companies to help the deal go through were unlikely to be kept.
The report appears to rule out the possibility of any broadcaster being allowed to own a football club. Analysts now believe the proposed takeover of Newcastle United by the cable group NTL, which Mr Byers referred to the newly formed Competition Commission yesterday, will also be blocked. In the City, shares in Manchester United and other listed football clubs such as Aston Villa and Newcastle fell as investors absorbed the report's implications.
Mr Blair's allies admitted that Mr Murdoch would be angry. The Prime Minister would seek to reassure him in an attempt to prevent the decision inflicting long- term damage on their close relationship.
Labour MPs hostile to Mr Murdoch were jubilant. "It is a good day," said Chris Mullin, chairman of the Home Affairs Select Committee. "It is clear evidence that the Government is not necessarily intimidated by Mr Murdoch, despite the size of his empire."
Both The Times and The Sun condemned the Government's decision, saying that football would be the loser.
The Times devoted two pages to the ruling and gave the whole of page three to two of the paper's senior writers, Raymond Snoddy and Rob Hughes, who stressed the important contribution that BSkyB had made to the game.
Full report, pages 6-7
Business Outlook, page 19
Sport, page 32
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