Sinclair-Tribune deal on the ropes

FCC Chairman has concerns about the deal; could be knockout blow – Sinclair and Tribune both pledge to fight on

(Editor’s Note: Updated at 4:10 p.m. on July 17 with new information.)

Even Ajit Pai is seeing through the scam.

On Monday, the FCC Chairman released a statement saying he had “serious concerns” about the $3.9 billion deal between Sinclair Broadcasting and Tribune Media, and recommended it would be sent to an administrative law judge – meaning approval of the deal – announced on May 8, 2017, could take longer – or not take place at all.

Based on a thorough review of the record, I have serious concerns about the Sinclair/Tribune transaction. I have shared with my @FCC colleagues a draft order that would designate issues involving certain proposed divestitures for a hearing in front of an administrative law judge. pic.twitter.com/WnCTGiC7Da

— Ajit Pai (@AjitPai) July 16, 2018

In addition, a draft of the order Reuters obtained from the FCC noted the transaction “may involve deception”.

The issue at hand is the plan to sell several stations to third parties in several markets to “sidecar companies” while Sinclair would be the defacto operator of the stations. The plan was restructured several times with plans to sell Tribune’s WGN-TV in Chicago to a Maryland car dealer for $60 million with ties to Sinclair.  Two stations in Texas were also planned to be sold to different third-party operators, also with ties to Sinclair.

By comparison, Chicago’s last commercial TV station deal saw WPWR-TV sold to Fox for $425 million in 2002 – worth more today when adjusted for inflation.

Another problem is the size of the deal. As it stands, Sinclair would be over the 39 percent cap with the Tribune purchase, even with the UHF discount factored in. The FCC brought back the discount last year in a process this blog declared a “scam” to help Sinclair after it was eliminated. Now, Pai is being investigated by the FCC’s inspector general on whether he made the changes to benefit the Maryland-based company.

In separate statements Tuesday morning, both Tribune and Sinclair were vowing to fight on – even if it meant delaying the deal further.

Sinclair noted it complied with  FCC rules in the way it handled their proposals to divest several stations.“[A]t no time have we misled the FCC in any manner whatsoever with respect to the relationships or the structure of those relationships proposed as part of the Tribune acquisition,”the group said. “Any suggestion to the contrary is unfounded and without factual basis. We are prepared to resolve any perceived issues and look forward to finalizing our acquisition of Tribune Media.”

Tribune Media’s statement was less fiery, but also expressed disappointment: “Tribune Media was disappointed to learn that the chairman had circulated an order designating certain issues for consideration by an Administrative Law Judge. It will review the FCC’s hearing designation order when released and expects to work with the FCC to explore ways to address the concerns identified. Until we have reviewed the order it is difficult to explain the potential issues it might create for the transaction.

The deal has run into opposition from the day it was announced. Opponents varied in the political spectrum from liberal groups such as MoveOn and Free Press to the conservative Parents Television Council and cable news channel Newsmax. The deal has also been opposed from several trade groups, such as the American Cable Association, who praised today’s move. Many cable operators fear Sinclair would have too much leverage in retransmission consent negotiations, resulting in price increases for consumers.

Sinclair has been involved in numerous controversies since the deal was announced. In March the company forced its anchors to read a word-for-word script denouncing “fake news”. The broadcaster is known for its conservative viewpoint, airing “must-run” commentaries from Mark Hyman and Boris Epshteyn.

From a sports perspective, the deal’s collapse could also impact Sinclair from obtaining local sports rights in Tribune’s three biggest markets, namely WGN’s with the Bulls, Blackhawks, Cubs, and White Sox as noted by Awful Announcing. Sinclair also has an over-the-top and digital subchannel Stadium, who holds rights to several collegiate conferences.

So what does this mean? A hearing in front of an administrative law judge could drag the approval process along for several more months or even years. Proposed mergers from Dish Network and DirecTV and Comcast-TimeWarner fell through because the FCC suggested they go through the ALJ process.

While Democrat FCC Commissioner Jessica Rosenworcel agrees with Pai, two other FCC commissioners are not yet on board: Brendan Carr and Michael O’Rielly, who criticized the long process and would support the action if the ALJ review was conducted  “include[s] sufficient and defined timelines for the ALJ to conduct and process a hearing.”

This comes as these types of mergers are coming under more scrutiny. The Justice Department last week decided to appeal a judge’s decision on the AT&T-TimeWarner merger, which could be unwound if the government’s action is successful. The ripple effect could also doom Comcast’s chances to buy most of 21st Century Fox’s assets. Ironically, the Justice Department greenlighted Disney’s attempt to purchase the same assets.

The real question now is how long can Sinclair and Tribune play this out? Shares for both dropped considerably Monday on Wall Street and now, the future of this deal – and Tribune Media specifically – is now in serious doubt.