FCC Chairman has ‘serious concerns’ about Sinclair/Tribune merger

July 16, 2018
Category: Business & Work

Editor's note: This story has been updated.

The Republican chairman of the Federal Communications Commission, which until now has seemed warm to allowing conservative-leaning Sinclair Broadcasting Group to buy Tribune Broadcasting and create the nation's biggest local TV ownership group, now says he has "serious concerns" about the deal. Chairman Ajit Pai wrote on FCC.gov:
 

“Based on a thorough review of the record, I have serious concerns about the Sinclair/Tribune transaction. The evidence we’ve received suggests that certain station divestitures that have been proposed to the FCC would allow Sinclair to control those stations in practice, even if not in name, in violation of the law. When the FCC confronts disputed issues like these, the Communications Act does not allow it to approve a transaction. Instead, the law requires the FCC to designate the transaction for a hearing in order to get to the bottom of those disputed issues. For these reasons, I have shared with my colleagues a draft order that would designate issues involving certain proposed divestitures for a hearing in front of an administrative law judge.”

 

Monday afternoon, Reuters posted a stunning development, saying, "A draft Federal Communications Commission order seen by Reuters on Monday said that Sinclair Broadcast Group Inc’s application for approval to purchase Tribune Media Co may 'involve deception.'" The initial Reuters story did not explain why that allegation was not included in the chairman's Monday statement, who suspected the "deception" or what would happen next.

The complications center around the fact that the Sinclair/Tribune merger would build such a large company. Currently, Sinclair owns or operates 173 television stations in 81 markets, with affiliations with all major networks, and says it "is the largest local news provider in the country." 

Troubling "side-car" deals

That reach would require the new company to sell some stations in the same market. Sinclair offered to sell stations where it would be holding more than one license but it would continue to operate some of those stations under a management agreement.  An April Wall Street Journal story said, "Under the plan submitted to the FCC last month, Sinclair said it would sell WPIX-TV New York to Cunningham Broadcasting Corp. for $15 million and WGN-TV Chicago to Steven Fader for $60 million. Both purchasers have long ties to Sinclair and its executive chairman, David Smith."

In March, The Chicago Tribune pointed out the connection between Fader and Smith, "The licensee of WGN would be a newly formed company headed by Steven Fader, a longtime business associate of Sinclair Executive Chairman David Smith. Sinclair will have an option to buy back the station for the same price, subject to adjustments, within eight years." 

Similarly, the Tribune said, the sale of WPIX in New York City has close ties to Smith. "Sinclair filed a similar application to sell WPIX to Cunningham Broadcasting Corp. for $15 million, with an option to buy it back, and an agreement to provide advertising sales and programming to the station. Cunningham Broadcasting is owned by the estate of Carolyn Smith, the mother of the Sinclair chairman."

These so-called "side-car" agreements appear to be what Pai is most concerned about. Sinclair proposed to "sell" the stations but would still operate the stations. That would allow Sinclair to duck the FCC's ownership limit, but run the station's news and sales operations.  It is a fairly common local television practice these days, but given the high-profile nature of the Sinclair purchase and the size of the deal, the FCC is balking and wants what the Journal calls "more distance more distance between Sinclair and the would-be owners of the properties."

Broadcasting and Cable reported late Monday, "According to an FCC official who asked not to be identified, the hearing designation order circulated to the other commissioners for a vote is targeted at the spin-offs with those 'cozy" connections,' and that the language includes possible 'lack of candor' and 'misrepresentation' in  Sinclair's structuring of the deal."

Tribune owns/operates 42 television stations in 33 markets, also with affiliations with all major networks. Tribune also owns cable network WGN America, digital multicast network Antenna TV and WGN Radio.  Tribune would expand Sinclair's ownership to big markets since Tribune owns stations in New York City, Chicago and Los Angeles. Tribune holds seven stations in the top 10 markets. The merger application says that under the proposed transaction, "the combined company would reach 72 percent of U.S. television households and would own and operate the largest number of broadcast television stations of any station group." 

The Sinclair/Tribune merger has been a high-profile deal driven by many factors. The FCC's own Inspector General opened an investigation into whether Commissioner Pai attempted to benefit Sinclair by loosening ownership rules. The merger took on political overtones when the commission's only Democrat said the FCC seemed to be bending ownership rules to benefit Sinclair.

President Donald Trump spoke on behalf of Sinclair in an April 2018 post.

Trump tweet

 

Sinclair made unwanted headlines in April when it forced local TV anchors at its stations to read a corporately written editorial. More than a dozen university journalism schools signed a letter of protest to Sinclair. Sinclair then yanked a $25,000 contribution to the National Press Photographers Association after NPPA questioned Sinclair's ethics. NPPA supporters donated more than the $25,000 to make up for the loss. 

It is unclear whether this new delay kills the merger but Wall Street certainly turned sour. Sinclair stock, which has been troubled for the year that the merger has been pending, dropped 5 percent in the minutes after the chairman's announcement. By late afternoon the stock dropped 11 percent. Sinclair stock is down 20 percent from its March 2017 highs.  Tribune stock dropped nearly 17 percent Monday.

Sinclair had hoped it could close the Tribune deal in the "late second quarter or early third quarter" of 2018. If the case goes to a judge, observers say it could delay any deal by a year. 

Opponents celebrate delay

Democratic FCC Commissioner Jessica Rosenworcel celebrated the chairman's new concerns in a tweet: "For too long FCC media policy has been custom built to serve the needs of Sinclair Broadcasting. This favoritism needs to come to an end. Today it does. There are now two votes at the FCC to halt the company's transaction with Tribune."

She posted on Twitter:

Rosenworcel post

Matthew M. Polka, the American Cable Association president and CEO, said the Sinclair/Tribune merger is "doomed." Cable companies oppose the merger because they say it would create an owner that would be so big that it could demand higher fees from cable companies that want to carry Sinclair station signals.

Polka said on the ACA's website, "From the beginning, ACA has insisted that the transaction is unlawful and certain to create numerous consumer harms, such as higher retransmission consent fees. It's well past time for Sinclair to realize that its effort to engage in massive media consolidation has failed and that it should withdraw the transaction without delay so the FCC no longer needs to devote any of its limited resources to a doomed endeavor." 

Michael Copps, the former FCC commissioner and now a special adviser to Common Cause, which opposes the merger, said,  "Sinclair could still restructure the terms of the deal, although maybe it is finally wearing out its welcome at the FCC."  Copps added:

"Public outcry has been building over Sinclair's takeover of local television for months. Just last week, Common Cause and its allies delivered over 600,000 signatures to the FCC urging the agency to block Sinclair's merger. The message is loud and clear: Local news should reflect the concerns and interests of the communities they serve, not the will of a wealthy, powerful few. Sinclair's merger would make it too large and too powerful."

There are more than 19,000 public comments about the Sinclair merger on the FCC's website. A review of a few hundred of those shows overwhelming opposition using the same language copied from an activist website.

The ACLU, also an opponent to the deal, reacted to Pai's announcement:

"More than 31,000 ACLU activists have reminded the FCC there's nothing free about a scripted press – and there’s nothing free about a public with no other option for local news. Let's keep the pressure on until the Sinclair merger is dead."