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Sinclair-Tribune deal in jeopardy after FCC boss questions legality of plan

July 16, 2018

U.S. Federal Communications Commission Chairman Ajit Pai questioned the legality of divestitures proposed by Sinclair Broadcast Group Inc. to win approval to buy Tribune Media Co., and said he would send the deal to a hearing—a step that could kill the proposed $3.9 billion deal.

“Based on a thorough review of the record, I have serious concerns about the Sinclair/Tribune transaction,” Pai said in a tweet.

Shares in Sinclair dropped as much as 7.9 percent, the most since February, on the news. Tribune shares plunged as much as 18 percent, for the biggest intraday drop since January 2017.

Chicago-based Tribune owns Indianapolis-based stations WTTV-Channel 4 and WXIN-TV Channel 59. WTTV is the city's CBS affiliate and WXIN is the local Fox affiliate. Some industry observers are predicting cuts at the local stations if Sinclair closes the acquisition.

Sinclair’s proposed sales of some stations to meet media ownership limits “would allow Sinclair to control those stations in practice, even if not in name, in violation of the law,” Pai in an emailed statement Monday. Pai said he had asked fellow commissioners to vote to send the deal to a hearing.

Under Sinclair’s plan, flagship Tribune station WGN in Chicago would go to a business associate of a top Sinclair executive, while other outlets would be sold to a company formerly controlled by the estate of the executive’s mother. Seven stations would go to 21st Century Fox Inc.

Pai said he had asked colleagues to vote to send the “certain proposed divestitures for a hearing in front of an administrative law judge.”

Commissioner Jessica Rosenworcel, the agency’s sole Democrat, said she voted to send the merger to a hearing. “Too many of this agency’s media policies have been custom built to support the business plans of Sinclair Broadcasting,” Rosenworcel said in an email statement.

Sinclair, which grew from a single TV station in Baltimore in 1971, is trying to leap into nationwide prominence with the deal for 42 Tribune stations in cities including New York. The purchase would lift Sinclair’s station total to more than 200. It’s being examined by the FCC and by antitrust regulators at the Justice Department.

Sinclair’s executive vice president, Barry Faber, didn’t immediately return an email and telephone call seeking comment. Gary Weitman, a Tribune spokesman, didn’t immediately reply to an email.

Even the threat of a lengthy FCC hearing can be fatal to a deal. In 2011, AT&T Inc. abandoned its proposed purchase of smaller T-Mobile US Inc. after the FCC proposed to send the merger to an agency judge for a hearing. The same move by the FCC in 2002 helped block EchoStar Communications Corp.’s acquisition of satellite-TV rival DirecTV.

“This delay may prove to be too much for Sinclair,” Paul Sweeney, a Bloomberg Intelligence analyst, said in an email. “Historically, Sinclair has been very successful pushing the edge of the envelope with the FCC. In this case, it looks like the FCC is prepared to shove back.”

Sinclair’s deal hinges on spinning off TV stations to comply with U.S. limits on broadcast ownership. Yet its proposals to sell stations from Pennsylvania to California drew scrutiny, with critics including business rivals say some of the transactions are designed to evade the ownership rules.

Two Texas stations are to be sold to a partner company that until recently was controlled by the estate of the mother of Sinclair’s controlling shareholders. And the flagship Tribune station in Chicago, WGN-TV, is going to an automobile executive who’s a business partner of Sinclair Chairman David D. Smith.

Sinclair has said the station buyers are independent businesses, and that it’s working diligently to follow the rules.

Criticism has arrived from groups including the American Civil Liberties Union, which in an FCC filing called the proposed deal “anti-competitive to its core.” The attorneys general of Illinois, Iowa and Rhode Island told the agency that “massive consolidation proposed in these applications violates the law.”

Among other things, Sinclair’s expansion would amplify the reach of voices including Boris Epshteyn, a former aide to President Donald Trump whose commentaries run on its stations.

Once all its proposed purchases and sales are completed, Sinclair calculates it would reach almost 59 percent of the U.S. audience—or less than 38 percent using a discount allowed under FCC rules. That snugs it up against the U.S. national cap of 39 percent.

 

 

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