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Tribune files $1B suit against Sinclair, scraps merger deal

August 9, 2018

Sinclair Broadcast Group Inc. saw its bid to become a nationwide powerhouse collapse Thursday after its would-be partner, Tribune Media Co., withdrew from a planned $3.9 billion merger that drew the ire of regulators.

Tribune blamed Sinclair and filed a $1 billion lawsuit that claimed the broadcaster “engaged in belligerent and unnecessarily protracted negotiations” with antitrust officials and with the FCC. The blow sent Sinclair’s shares tumbling as much as 5.4 percent.

Had the deal gone through, it would have reshaped the Indianapolis television landscape. Tribune owns WTTV-TV Channel 4 and WXIN-TV Channel 59.

“Regulatory approval should not have been hard to come by,” Tribune said in the complaint filed in Delaware Chancery Court. “Sinclair fought, threatened, insulted, and misled regulators in a misguided and ultimately unsuccessful attempt to retain control over stations that it was obligated to sell.”

The implosion marks the latest twist in an increasingly strange environment for mega-deals under President Donald Trump. A Sinclair-Tribune combination would have been unthinkable in the Obama era and was only made possible because of a rule change by the newly installed chief at the U.S. Federal Communications Commission. But the FCC later questioned Sinclair’s honesty and sent the proposed tie-up for a hearing by an administrative law judge.

Trump, who fought tooth-and-nail to stop another monster-merger, AT&T Inc.’s acquisition of Time Warner Inc., lashed out and called the FCC move “disgraceful.”

“Deals are getting done and yet somehow Sinclair ran into trouble and I think everyone’s surprised that this happened,” Barton Crockett, an analyst with FBR Capital Markets, said on Bloomberg Television. “Tribune is not only surprised but pretty upset about it.”

Ronn Torossian, a spokesman for Sinclair, didn’t immediately respond to a request for comment.

Sinclair shares tumble

Sinclair stock tumbled to as low as $25.65 a share. The stock has now plunged almost 20 percent since mid-July, when concern about FCC questions heated up. Tribune, meanwhile, rose as much as 3.6 percent to $34.85 on Thursday.

The FCC order on July 18 asked whether Sinclair was in fact the hidden buyer in a proposal to sell Chicago’s WGN-TV to a Maryland automobile executive with no prior broadcast experience and ties to Sinclair management. The agency also questioned links between the Maryland-based broadcaster and a buyer proposed for stations in Dallas and Houston. Tina Pelkey, an FCC spokeswoman, declined to comment.

The FCC wanted a judge to decide whether “Sinclair engaged in misrepresentation and/or lack of candor in its applications” and asked whether Sinclair had “attempted to skirt the commission’s broadcast ownership rules.”

Hearings with administrative law judges can take months, and the prospect of enduring one has killed previous deals.

“This uncertainty and delay would be detrimental to our company and our shareholders,” Tribune Chief Executive Officer Peter Kern said in a statement Thursday.

Sinclair proposed the deal in May 2017, testing federal ownership limits with the plan to purchase 42 stations, including outlets in New York, Chicago and Los Angeles. After divestitures, the transaction would have expanded Sinclair’s footprint to more than 200 stations. It’s already the largest U.S. broadcaster by number of stations, with 192.

What now?

The setback likely won’t mark the end of Sinclair’s consolidation ambitions, said Paul Sweeney, an analyst at Bloomberg Intelligence.

“While walking away from its merger with Sinclair prevents Tribune from languishing in regulatory purgatory, it’s unlikely to diminish Sinclair’s appetite for future M&A,” he said.

Sinclair executives said on the company’s earnings call Wednesday that they’re still looking to buy more broadcast stations or regional sports networks regardless of the outcome with Tribune. They also are reportedly launching a streaming news service that is seen as a competitor to Fox News.

The politically conservative broadcaster is seen as friendly to Trump. He has praised the company on Twitter, saying it’s superior to AT&T’s CNN and Comcast Corp.’s NBC. Its on-air voices include Boris Epshteyn, a former Trump aide.

Ownership limits

By absorbing Tribune, Sinclair would have grown large enough to exceed federal ownership limits. It offered divestitures in order to comply. It is those transactions that drew the ire of the FCC and its Republican chairman, Ajit Pai. Even after the proposed sales, the company would “control those stations in practice, even if not in name, in violation of the law,” Pai said a July 16 statement.

Sinclair had planned to sell seven Tribune stations to 21st Century Fox Inc. That deal has also now been scrapped.

Pai has loosened media ownership rules since being appointed by Trump last year, and Democrats have said the chairman sought to benefit Sinclair -- an assertion the FCC head rejected. Whether Pai sought to help Sinclair is said to be subject of a probe by the FCC’s inspector general.

Tribune also reported second-quarter adjusted earnings per share of 99 cents, beating the highest analyst estimate, and consolidated operating revenue of $489.4 million, topping the average estimate of $482.3 million.

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