FCC Chairman calls part of Sinclair/Tribune deal a ‘possible sham transaction’

July 19, 2018
Category: Business & Work

The Federal Communications Commission, once friendly toward Republican-leaning Sinclair Broadcast Group, now questions whether the country's biggest owner of TV stations was trying to pull a "sham."

Sinclair is attempting to buy Tribune TV stations in a $3.9 billion deal. It would make the biggest local TV broadcast group in the country.

But now the FCC says it suspects Sinclair of trying to skirt the government's rules on how much of the country a TV owner can serve by selling some stations to friends but keeping control of the stations. So the FCC sent the planned sale to an administrative judge for review.

Sinclair hoped to avoid the administrative judge because that action will take more time, maybe a lot more time, and adds to the chances that the deal might fall apart.

The FCC, in a hearing designation order, or HDO, released Thursday, said:

The record raises significant questions as to whether those proposed divestitures were in fact “sham” transactions.

The FCC explains its concerns

Sinclair, already the nation's biggest TV station owner, wanted to add Tribune’s 42 TV stations in 33 markets, including stations in New York City, Los Angeles and Chicago.  But the FCC limits how much of the U.S. population one owner may reach with its station's signals, so Sinclair would have to sell 23 TV stations to stay under the limit.

The FCC's new suspicions center on how Sinclair would dispose of Tribune flagship station WGN-Chicago to comply with regulations capping how much U.S. audience one group may serve. The FCC unravels the plan explaining how Sinclair intended to sell WGN to Steven Fader:

… an individual (Steven Fader) with no prior experience in broadcasting who currently serves as CEO of a company in which Sinclair’s executive chairman has a controlling interest.  Moreover, Sinclair would have owned most of WGN-TV’s assets, and pursuant to a number of agreements, would have been responsible for many aspects of the station’s operation. Finally, Fader would have purchased WGN-TV at a price that appeared to be significantly below market value, and Sinclair would have had an option to buy back the station in the future. Such facts raise questions about whether Sinclair was the real party in interest under Commission rules and precedents and attempted to skirt the Commission’s broadcast ownership rules.

To emphasize how questionable the whole WGN spin-off sale was, the FCC pointed out that Sinclair planned to sell the station to Fader for $60 million. A competing Chicago station, WPWR, sold for $425 million in 2002 — seven times as much. The commission also noted that this is not the first time Sinclair and Cunningham (formerly known as Glencairn, Ltd.) have partnered on a sale and purchase.  The commission said that a 1998 transaction raised concerns similar to the ones coming now after Glencairn appeared to have turned over the stations to Sinclair to operate.

Sinclair told the FCC in a March filing that it planned to sell WPIX New York to Cunningham Broadcasting Corporation and it would sell WGN-TV Chicago for $60 million to a newly formed company headed by Steven Fader. Both Cunningham and Fader have long ties to Sinclair executive chairman David Smith. Cunningham Broadcasting is owned by the estate of Carolyn Smith, the mother of the Sinclair chairman, according to the Chicago Tribune. Steven Fader is the CEO of Atlantic Automotive, a Maryland auto dealership group in which Smith holds a controlling interest.  (By April, Sinclair decided to keep WPIX and sell other stations in Texas instead.)

One of the details that also piqued attention is the provision in the sales that said, after eight years, Sinclair could buy the stations back and pay the same amount for the stations that Sinclair sold them to Cunningham and Fader.  

The FCC order sheds even more light on why the Commission is concerned not just about the WGN sale, but about the planned sale of two stations, one in Dallas (KDAF) and one in Houston (KIAH), to Cunningham Broadcasting.  

According to the objectors, problematic aspects of the proposed divestitures of the Texas stations include: the intertwined relationship between Sinclair and Cunningham, particularly in light of past commission findings regarding the nature of the relationship; the recent acquisition of the voting shares of Cunningham by Michael Anderson, a Sinclair associate, for a $400,000 sales price that is far below market value; the fact that the children of Sinclair’s controlling shareholders are beneficiaries of trusts controlling the non-voting shares of Cunningham with the parents holding options to buy the voting shares in the future; and Sinclair’s apparent guarantee of $53.6 million of Cunningham’s debt.   

The FCC said it is concerned that essentially, Sinclair appeared to be selling the stations to entities who had no real interest in broadcasting, but that Sinclair was creating a "sham" transaction, by selling the stations for far less than they are worth, then eventually buying them back at the same low price.

Sinclair counter-offer rejected

Wednesday, Sinclair tried to head off the FCC move to send the sale to the administrative judge. Sinclair offered to keep ownership of WGN and sell stations in Houston and Dallas to a holding company rather than to Cunningham. But it wasn't enough to stop the Republican-controlled FCC from sending the case to the court system.  

The FCC held its strongest gut-punch to the Sinclair deal for the last page of the order:

We note that Sinclair represented to the Commission that it would comply with our broadcast ownership rules by seeking approval of its application — in part based on the proposed divestitures to Cunningham and Fader — and did not fully disclose facts such as the pre-existing business relationships between Fader, Smith, and Sinclair nor the full entanglements between Cunningham, Smith, and Sinclair.  As such there is a substantial and material question of fact as to whether Sinclair affirmatively misrepresented or omitted material facts with the intent to consummate this transaction without fully complying with our broadcast ownership rules.