Friendly buyers step up to help Sinclair shed enough TV stations to appease regulators

Baltimore-area business executives with intimate ties to Sinclair Broadcast Group have stepped in to help Sinclair win approval to buy two dozen Tribune television stations, a deal that would cement Sinclair’s spot as the nation’s biggest broadcaster.

Hunt Valley-based Sinclair has proposed shedding TV stations in 11 markets to allow the merged company to stay under federal ownership limits as it seeks approval for the $3.9 billion deal.

The company told the Federal Communications Commission that it has buyers for two of the biggest market stations owned by Tribune. It has outlined arrangements in which it would sell a Chicago station to the head of a Towson-based, multi-state auto dealership group largely owned by Sinclair’s chairman. And it would sell a New York station to a company controlled by the estate of the chairman’s mother.

Sinclair would continue to reap advertising and other revenue from those stations and later have an option to buy them back.

Such so-called “joint sales” or “shared services” agreements give Sinclair a way to keep a hand in the operations of prime stations the company would otherwise be reluctant to sell, one analyst said. It’s a model Sinclair has employed successfully in the past to address FCC ownership restrictions, but critics say the arrangements leave Sinclair with too much influence in too many markets.

The Tribune Media acquisition, announced last May, would give Sinclair control of 233 television stations, including 42 Tribune-owned stations and a presence in top markets. (Tribune Media, formerly part of Tribune Co., once owned The Baltimore Sun and other newspapers, but spun them off in 2014.)

With Tribune’s stations, Sinclair would have reached 72 percent of U.S. households. Since then, Sinclair has proposed selling as many as 18 of the stations.

“Ideally, the company would not want to divest any of these stations,” said Tuna Amobi, CFRA Research senior analyst. “You wouldn’t expect New York and Chicago. Those are prime markets from an advertising perspective. … Obviously, the company is trying to fulfill the FCC ownership requirement and at the same time give itself the best option to at least reap some of the financial benefits of at least getting some type of revenue.”

Company officials defended the practice of sharing services as falling within FCC guidelines. Such arrangements, which local TV stations use to share or outsource advertising sales or news production, have been increasingly common as broadcasters compete with internet and cable TV outlets.

“These agreements are structured to be consistent with similar agreements that the FCC has approved for over ten years,” Rebecca Hanson, Sinclair’s senior vice president of strategy and policy, said in an email.

Broadcasters have argued that such agreements help stand-alone companies share costs and bring efficiencies of scale to their operations, allowing independently owned stations to thrive in the marketplace. Viewers and advertisers rarely raised objections when the FCC began approving such arrangements decades ago, they say.

As of Dec. 31, Sinclair provided programming, sales and operational services to a dozen stations whose licenses were owned by third parties. It provided non-programming-related sales, operational and administrative services to another 33 stations it does not own. Typically, station owners retain control of any services Sinclair provides.

But critics called those “sidecar” arrangements an attempt by Sinclair to skirt federal ownership rules.

Sinclair “has long specialized in propping up shell companies to evade FCC rules,” said Craig Aaron, president and CEO of Free Press and an outspoken opponent of the Tribune acquisition.

The relationships between Sinclair executives and the buyers raise further questions in critics’ views about how well the deals would serve the public interest.

Sinclair has reached an agreement with Steven B. Fader, a Towson auto dealer and investor, who has agreed to buy Tribune’s WGN-TV in Chicago for $60 million. Fader is CEO of Atlantic Automotive Corp., a holding company for MileOne Autogroup, an auto sales and service network of 72 franchises at 40 dealerships in Maryland, Pennsylvania, Virginia and North Carolina.

Sinclair Executive Chairman and founder David D. Smith, has a controlling interest in Atlantic Automotive and serves as member of its board, Sinclair’s proxy statement shows. Atlantic is also a Sinclair advertiser and tenant.

According to a joint sales agreement filed with the FCC in an application to transfer the license of WGN-TV, Sinclair would be retained to sell regional and local spot advertising, including political ads, sponsorships, paid programming, long-form advertising and website ads as well as to provide local news and other programming, for a fee of 30 percent of the station’s net sales.

Fader is also founder and chairman of Atlantic Capital Group, which has invested in hotels, residential projects and a variety of businesses throughout the U.S. It has a stake in Honest Tea, an organic tea maker that was founded in Bethesda and acquired in part in 2008 by the Coca-Cola Co. He’s also chairman of developer Caves Valley Partners, which is involved in a number of Baltimore-area projects including Towson Row, Stadium Square and the Horseshoes Casino Baltimore.

In an email, Fader declined to comment on the specifics of the WGN transaction with Sinclair because it is being reviewed by the FCC.

“What I can say however, is that as a business executive, I seek investment opportunities that contribute to and preserve value in the local community,” Fader said. “I have numerous ties to the city of Chicago, and WGN has a long history of serving Chicago’s loyal viewing community, so it is an honor for me to be entrusted to carry on its tradition of excellence that Chicago has come to expect.”

Baltimore-based Cunningham Broadcasting Corp., reached a similar shared services agreement with Sinclair in a deal to buy New York’s WPIX for $15 million.

Cunningham, which owns eight TV stations, including WNUV-TV in Baltimore, is owned by the estate of Carolyn C. Smith, the mother of Sinclair’s controlling shareholders, including Smith and his three brothers. The Carolyn Smith estate owns all the voting stock, while the non-voting stock is owned by trusts benefiting the controlling shareholders’ children. Some Sinclair stations provide services to Cunningham stations through joint sales or shared service agreements.

Michael Anderson, Cunningham’s president, could not be reached for comment.

Sinclair’s recent divestiture proposals have stoked the fires of an already controversial deal.

Critics charge that the FCC under the leadership of Trump appointee Ajit Pai has been changing broadcast ownership and other rules to ease the way for the conservative-leaning Sinclair to merge with Tribune. In November, the FCC eliminated a rule that required at least eight independently owned TV stations to be in a market before any entity may own two stations. It also allowed exceptions to a ban on an entity owning two of the top four stations in a market, saying the changes would promote ownership diversity and allow broadcasters and local newspapers to better compete in the digital age.

In a Feb. 28 letter to the FCC, a consultant to conservative news outlet Newsmax Media Inc. called Sinclair’s divestiture proposals “a sham.”

The Coalition to Save Local Media, a five-member group including Common Cause, the Competitive Carriers Association, the Computer and Communication Industry Association and others, has filed similar objections with the FCC.

“The sidecar arrangements will give Sinclair the ability to continue to manage these stations after they have been acquired by third parties,” said John B. Simpson, the Newsmax consultant.

Shared service agreements, though allowed by the FCC, are not necessarily in the public interest, said Yosef Getachew, director of media and democracy programs for Common Cause.

It “isn’t good for local media and diverse voices that should get promoted through local broadcasting,” he said. “These types of agreements are anti-competitive. With Sinclair it becomes exacerbated because of the massive size of their merger.”

If Sinclair eventually regains ownership of WPIX and WGN, opponents say, its audience reach would jump above the national broadcast ownership cap of 39 percent to 45 percent. Before that could happen, however, the FCC would have to lift the nationwide limit on audience reach.

In the face of such criticism, the FCC must decide in coming months whether to approve the license transfers to Fader and Cunningham Broadcasting, but one analyst expects tat Sinclair may have not only precedent but pro-business regulators on its side.

“I would argue that under normal circumstances, regulators would look at these type of agreements as not conducive to the spirit or intent of ownership and [would] want to avoid a situation where companies try to run around those rules,” Amobi said. “but ... you have a much more accommodating regulatory environment.”

lorraine.mirabella@baltsun.com

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