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Sinclair Broadcast could be forced to sell assets, revise acquisitions under proposed FCC rules

Sinclair Broadcast Group Inc. is one of several large broadcasters that could be forced to sell television stations or other assets or rethink future acquisitions under new media ownership rules the Federal Communications Commission is set to consider later this month.

FCC Chairman Tom Wheeler proposed changes that would restrict the number of TV stations controlled by a single owner in a market, a step designed to protect competition and diversity in local media. Specifically, the FCC is examining broadcasters' use of sharing arrangements for sales as well as facilities and employees.

But broadcasters say that restricting their use of "joint sales agreements" or "shared service agreements" between stations actually would harm diversity in the industry and make it tougher to compete with large cable companies.

Under joint sales agreements, or JSAs, one station sells advertising time for another station in the same market, helping reduce costs. Under shared agreements, stations might pool resources such as news operations or helicopters.

Hunt Valley-based Sinclair, one of the nation's largest TV station owners and one of the most active in media acquisition deals, already is acting in anticipation of rules that could change as soon as March 31 when commissioners are scheduled to meet. If rules change, waivers could be available and broadcasters likely would have two years to come into compliance.

On Thursday, Sinclair offered to restructure its nearly $1 billion planned purchase of seven ABC affiliates and a Washington-based cable news network to try to satisfy the FCC's cross-ownership concerns. In a letter Thursday to the FCC, Sinclair proposed eliminating "shared service agreements," at TV stations in three of the markets where it plans to buy an ABC affiliate from Allbritton Communications.

Sinclair already planned to sell stations in Harrisburg, Pa., Charleston, S.C., and Birmingham, Ala., but would continue to provide services to those stations. Now it said it would not provide any services or sales to those stations after they are sold or to any others in those markets.

The company would restructure its deal, announced in July, in hopes of completing it by this July, even though "we believe the shared services arrangements that were contemplated would have provided significant public interest benefits, including promoting minority ownership of broadcast stations," said Sinclair CEO and President David Smith in a statement.

The broadcaster said it was prompted to act by a March 12 FCC notice indicating the agency would more closely scrutinize certain shared service arrangements. The FCC said it has concerns over sharing arrangements where a broadcaster has a financial interest, such as an option to purchase or is a guarantor of financing.

Under current rules, a single entity is prohibited from owning more than one station in a small- or medium-sized market, but it could have JSAs with other stations in the market.

Wheeler's proposal would identify the dependent stations as "owned" by the larger stations under certain circumstances but would not eliminate JSAs entirely.

In a blog post earlier this month, Wheeler said the rise of JSAs in small- and- medium-sized TV markets "requires immediate attention… These larger stations selling the advertising are the de facto owners of smaller stations — owning all of the assets, retaining a significant amount of profits and programming all of the news hours. Hence… by any reasonable standard, these smaller stations in the JSAs are not independent."

Broadcasters fear that putting an end to most sharing agreements would force some stations to be sold or shut down, said Dennis Wharton a spokesman for the National Association of Broadcasters.

"These sharing arrangements have been a means by which to help smaller and medium market television survive and provide better programming to the community without outright ownership of two stations by one company," Wharton said. The proposals "have a potential to be devastating to the industry in terms of jobs and finances.

"Sharing arrangements result in stronger stations partnering with weaker stations to create more local news, better public affairs programming and more competition [with cable TV companies] who would love to see these companies go out of business," he said.

Sinclair, based in Hunt Valley, owns or provides programming or services to 149 TV stations in 71 markets, including joint sales agreements with 24 of those stations, according to the company's filings with the Securities and Exchange Commission. The company has said that JSAs account for about 10 percent of revenue.

Sinclair has been criticized by Free Press, which advocates for diverse media ownership, as using shared services agreements to control news operations at multiple stations in a market.

On Monday, Wells Fargo senior analyst Marci Ryvicker downgraded Sinclair and other broadcasters' stock to "market perform" from "outperform," sending shares down in the sector.

"While we continue to really like the broadcast TV business due to strong advertising fundamentals… we just came back from a day in DC and can't help but feel incrementally negative on the regulatory environment — especially as it relates to pending and future [mergers and acquisitions]," Ryvicker said in a report.

Ryvicker said she believes regulators are determined to tighten JSA rules and that no pending deals with any kind of shared arrangement will be permitted to close unless they are restructured to exclude such stations and any related loan guarantees. Under the FCC proposal, any entity that sells more than 15 percent of the advertising time will be treated as the owner.

"There seems to be a 'survival of the fittest' attitude," Ryvicker said in the note. "Specifically, it was mentioned several times that there is no need for all 1,800-plus television stations and therefore it was our sense that the FCC is more than willing to let various stations go dark…

"The FCC is very much in support of local news — but some believe that the traditional business model is not the only or best way to produce this content," she wrote.

The broadcasters' trade group has proposed a compromise, presented Thursday to FCC Commissioner Mignon Clyburn, who has reportedly expressed hope of finding a balance in the JSA debate.

The broadcasters want to be allowed to continue operating and entering into new JSAs as long as the licensee controls at least 85 percent of programming, keeps at least 70 percent of net advertising revenue, controls advertising rates and has an option to hire its own advertising sales staff. The group also proposed that JSA participants show clear and specific public interest benefits.

Another broadcast group, the National Association of Black Owned Broadcasters, recently endorsed using JSAs to promote minority operation of TV stations. Minority broadcast ownership in the U.S. has declined from 21 commercial TV stations licensed to African-American-controlled companies to only three, and two of those are being operated under JSAs, the group said.

"It is clear that without such policies, the decline of minority ownership in the broadcast industry will continue," said James L. Winston, executive director of the group, in a March newsletter.

FCC Commissioner Ajit Pai, one of two of five commissioners opposing proposed changes, on Thursday released findings estimating that 75 percent of African-American-owned TV stations are involved in JSAs, while 43 percent of female-owned commercial TV stations are involved in JSAs.

"These findings raise serious questions," Pai said in a release. "Why is the FCC targeting pro-competitive sharing arrangements that appear to disproportionately benefit female and African-American broadcasters?… The commission should not accelerate the troubling trend of declining minority ownership."

lorraine.mirabella@baltsun.com

Copyright © 2014, The Baltimore Sun
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