New trouble for Sinclair-Tribune merger: FCC votes to send it to judge

July 18, 2018
Category: Business & Work

Hours after Sinclair Broadcast Group tried to revive the biggest merger in local broadcast television history, Federal Communications Commission members voted to send the $3.9 billion deal to an administrative judge. The FCC website posted a notice Wednesday evening, saying only:

This evening, the Commission unanimously voted to adopt a Hearing Designation Order regarding the Sinclair/Tribune transaction. We expect the Order will be released publicly tomorrow (Thursday.) 

The two sentences appear to be a smackdown to Sinclair's attempt to answer the FCC's harshly worded concerns about the merger. This is the same FCC that was once Sinclair-friendly, the same FCC that less than a year ago appeared to be changing rules expressly to allow the merger. Then, on Monday, the deal soured when leaked versions of the Hearing Designation Order (called an HDO) suggested that Sinclair may have attempted to deceive the commission. FCC chairman Ajit Pai said he was concerned that Sinclair may have attempted spinning off some of the Tribune stations it was buying in Chicago and New York to companies that have close ties to Sinclair's founding family. The FCC said it appears Sinclair was attempting an end-run around the commission's regulations limiting station ownership in America.

Why the FCC is newly concerned about this merger is still something of a mystery that the order to be released Thursday may explain.

Sinclair corporate statements have repeatedly stated that the company was surprised by the FCC's new concerns this week. Indeed, Sinclair's plans for how it would sell off some of the Tribune stations have been known for months. The Wall Street Journal reported in April, "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."

Months ago, journalists also reported other parts of the deal that commissioners are just now raising as concerns. In March, The Chicago Tribune reported on the connection between Fader and Smith, saying: "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." 

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."

Wednesday morning, Sinclair offered to it change how it divests stations it buys from Tribune in Chicago, Dallas and Houston. A corporate statement Wednesday said:

 

 Sinclair has withdrawn the pending divestitures of stations in Dallas (KDAF) and Houston (KIAH) to Cunningham Broadcasting Corporation and Tribune has withdrawn the pending divestiture of WGN in Chicago to WGN-TV LLC.  Sinclair intends to request permission from the FCC to put the Dallas and Houston stations into a divestiture trust to be operated and sold by an independent trustee following the closing of the Tribune acquisition.  As a result of the withdrawal of the application relating to WGN, Sinclair will simply acquire that station as part of the Tribune acquisition, which is, and has always been, fully permissible under the national ownership cap.

That means under its new proposal Sinclair would keep WGN, Tribune's flagship local station, and would sell off the Dallas and Houston stations. The FCC limits how much of the national audience any local TV owner can reach. Sinclair says its new proposal would keep Sinclair under the FCC's station ownership limits.

Sinclair owns/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."  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.  

Sinclair's Wednesday statement added a note of urgency for the FCC to get the Tribune takeover back on the rails. 

There can be no question that the FCC’s concerns with sales to certain parties have been eliminated in light of the withdrawals of the applications relating to Dallas, Houston and Chicago. Accordingly, we call upon the FCC to approve the modified Tribune acquisition in order to bring closure to this extraordinarily drawn-out process and to provide certainty to the thousands of Tribune employees who are looking for closure. 

The race for approval

There are other reasons that Sinclair would want to finish the purchase quickly. TV companies are raking in millions from 2018 mid-term political spending and the merger is also in peril because consumer groups are asking the U.S. appeals courts to overturn an FCC ruling that critics say was tailored for Sinclair, a Republican-friendly broadcaster.  

The government forbids any broadcast company from reaching more than 39 percent of the American population. But last fall, the FCC relaxed a regulation that changed how the government calculates that audience. In the days before cable TV, the government decided that UHF stations, those stations above channel 14 over-the-air, could be counted as half as many potential viewers as VHF stations. So for example, a UHF station in a market of a million people would only count as a half million people for FCC calculations. If the court overturned the so-called "UHF discount" before the merger can close, the new Sinclair ownership would own stations that cover more than three-fourths of the country, way above the 39 percent cap.  

When Democrats dominated the FCC during the Obama administration, the "UHF discount" died because the government said most people get their TV signals from cable and there was no difference in signal-strength as there was when people used antennas. 

And the U.S. Circuit Court of Appeals in Washington, D.C., did not appear to be warm to the idea of re-instating the UHF discount. In April, two justices said during a hearing that the rule seemed to be obsolete. The third judge said if the FCC wanted to allow stations to cover more of the country, the government should examine the 39 percent limit but not reinstate the discount, which is no longer needed.

If the FCC approved the merger and then the court ruled against the UHF discount, Sinclair might be "grandfathered" and allowed to keep its new stations.