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Sinclair-Tribune merger in jeopardy after FCC Chairman expresses 'serious concerns'

Sinclair Broadcast Group’s proposed $3.9 billion takeover of Tribune Media appears in jeopardy after the head of the Federal Communications Commission raised concerns Monday about the controversial deal.

FCC Chairman Ajit Pai, an appointee of President Donald J. Trump who has been viewed as friendly to such a merger, said in a statement that after a thorough review, “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,” Pai said. “When the FCC confronts disputed issues like these, the Communications Act does not allow it to approve a transaction.”

Pai said Monday that he is circulating a draft order among FCC commissioners that would require an administrative law judge at the agency to hold a hearing on issues related to some of the proposed station sales.

Shares of both companies plunged on the news. Hunt Valley-based Sinclair’s stock fell 11.7 percent Monday to close at $29.10 a share, while shares of Chicago-based Tribune tumbled 16.7 percent, closing at $32.12 each.

In a statement late Monday, a Sinclair spokesman said Pai’s announcement left the company shocked and disappointed. The broadcaster has been transparent during its many meetings and discussions with the FCC about the station buyers, proposing the types of arrangements broadcasters have used for years with FCC approval, the company said.

“We have fully identified who the buyers are and the terms under which stations would be sold to such buyers, including any ongoing relationship we would have with any such stations after the sales,” said Ronn Torossian, the spokesman. “We are prepared to resolve any perceived issues and look forward to finalizing our acquisition of Tribune Media.”

The merger “will create numerous public interest benefits and help move the broadcast industry forward at a time when it is facing unprecedented challenges,” Torossian said.

Sinclair announced plans to buy Tribune Media in May 2017, a deal that would cement its spot as the nation’s largest broadcaster. In April, it announced plans to sell 23 stations in 18 markets after the merger to stay under federal TV ownership limits and win approval by federal regulators, including the FCC and the U.S. Department of Justice.

Under Sinclair’s divestiture plan, stations would be sold to six different buyers, including a Towson auto dealer, a New York investment firm, Baltimore-based Cunningham Broadcasting Corp., Washington-based Howard Stirk Holdings, and Iowa-based media giant Meredith Corp.

In some cases, Sinclair would sell stations but still control them through so-called joint sales agreements. For instance, Sinclair had said it would provide sales and other services to several of the stations. Sinclair also has close ties with some of the buyers.

Marci Ryvicker, a senior analyst with Wells Fargo Securities, said in a research note Monday that Pai’s comments, while focused on the station sales, could place the whole deal at risk.

“It sounds like the [administrative law judge] is being asked to review just the divestiture stations, but our legal contacts suggest there could be full review of the entire transaction,” Ryvicker wrote. “Given that this order seems to specify the divestiture stations, [Sinclair] may be able to work with the FCC to get this approved. That said, our legal contacts believe Pai went far enough to suggest the deal is at more serious risk. We think [Sinclair] is digesting its options at the same time that we are.”

Without the proposed TV station sales, Sinclair would control 233 television stations, including 42 Tribune-owned stations and a presence in such top markets as New York and Chicago. Those stations would reach 72 percent of TV viewers, in excess of FCC limits.

(Tribune Media, formerly part of Tribune Co., once owned The Baltimore Sun and other newspapers, but spun them off in 2014.)

The deal has been facilitated by the FCC’s easing of TV station ownership limits under Pai. The FCC voted in April to reinstate the so-called UHF discount. It allows stations broadcasting on those higher-frequency airwaves to count only half of their audience against a cap allowing a single owner’s stations to reach no more than 39 percent of the nation's television households.

In light of disputed issues concerning the station sales, the FCC is required by law to designate the deal for a hearing “in order to get to the bottom of those disputed issues,” Pai said.

Sinclair’s deal for Tribune has come under fire from groups that are worried about the loss of diverse voices in the broadcast industry, a concern heightened by Sinclair’s conservative leanings. Critics have accused the FCC and Pai of changing rules to benefit Sinclair.

“Today’s announcement represents a remarkable shift by the FCC chairman,” and is the right thing to do under the law, said the organization Free Press, a critic that has filed two lawsuits in federal court against what it views as the FCC’s weakening of ownership limits.

“This is a giant win for the public, and a huge setback for Sinclair’s mega-merger plans,” Free Press Policy Director Matt Wood said in a statement.

Sinclair has said the merger would allow it to invest more heavily in local news operations and keep pace in a changing media landscape in which broadcasters also compete with online and cable news and entertainment sources.

The company envisions creating “a leading broadcast platform with local focus and national reach,” Sinclair CEO and President Chris Ripley said in April when Sinclair announced its divestiture plan.

At a shareholder meeting last month, Ripley said he expected the deal to close sometime after July 12, the FCC’s deadline for public comments on the station sales. After the meeting, he said opposition to the deal has largely been funded by special interests and competitors who opposed the merger for commercial reasons.

Karyl Leggio, a finance professor at Loyola University Maryland, said the announcement came as a surprise from an FCC chair viewed as pro-business.

But such a degree of scrutiny by federal agencies is not unusual in cases involving a large consolidation of market share, she said. Sinclair may need to divest additional stations, or different properties.

“No deal is ever assured, but in my opinion this is a setback, not an end,” she said. “The FCC is properly concerned about market concentration and divesting stations to owners that have strong links to the Sinclair ownership. … Now it’s up to Sinclair to work through those concerns.”

Commissioner Jessica Rosenworcel, originally nominated by President Barack Obama, said Monday she has voted to approve Pai’s order.

“Too many of this agency’s media policies have been custom-built to support the business plans of Sinclair Broadcasting,” Rosenworcel said in a statement. “With this hearing designation order, the agency will finally take a hard look at its proposed merger with Tribune. This is overdue, and favoritism like this needs to end.”

Wood, of Free Press, is optimistic this is a first step toward rejecting the merger, saying it’s rare for such deals to be sent to hearings and even more rare for parties to win FCC approval in that hearing.

“There’s simply no way for Sinclair to fit under the 39-percent national-audience reach cap without significant divestitures,” Wood said, even if the UHF discount withstands challenges. “Hundreds of thousands of petitions against the deal have been flooding into the agency, and people have taken to the streets outside of Sinclair’s corporate headquarters to protest. The people have spoken and Ajit Pai appears to be listening .…

“Broadcasters are entitled to a political viewpoint,” Wood continued. “What they aren’t entitled to is an outsized megaphone for those views.”

Christopher Ruddy, CEO of the conservative media company Newsmax Media, also applauded Pai’s move, calling it nonpartisan and a departure from the FCC’s partisan actions during the Obama administration.

“Clearly this decision is based on the facts and law — specifically that Sinclair has not complied with requirements set forth by the FCC to promote diversity, localism and competition,” Ruddy said in a statement.

lorraine.mirabella@baltsun.com

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