The decision ends Hunt Valley-based Sinclair’s more than year-long effort to establish a broadcasting juggernaut with national reach and its conservative bent.
"We are extremely disappointed that after 15 months of trying to close the Tribune transaction, we are instead announcing its termination," Chris Ripley, Sinclair’s president and CEO, said in a statement later Thursday.
Already the nation’s largest TV station owner, Sinclair agreed to buy Chicago-based Tribune and its 42 stations for $3.9 billion in May 2017. The deal would have given Sinclair control of 233 stations, reaching 72 percent of U.S TV households, and a presence in such top markets as New York and Chicago. (Tribune Media was formerly part of Tribune Co., which once owned The Baltimore Sun and other newspapers, but spun them off in 2014.)
While federal regulators initially seemed friendly to the merger, even changing some ownership rules to make it easier to approve the deal, the Federal Communications Commission changed course last month, voting to send Sinclair’s application to a review by an administrative law judge, typically a death knell for such mergers.
"In light of the FCC's unanimous decision, referring the issue of Sinclair's conduct for a hearing before an administrative law judge, our merger cannot be completed within an acceptable timeframe, if ever," Tribune CEO Peter Kern said during a conference call Thursday. "This uncertainty and delay would be detrimental to our company and our shareholders. Accordingly, we have exercised our right to terminate the merger agreement, and, by way of our lawsuit, intend to hold Sinclair accountable."
In its harshly worded lawsuit in Delaware’s Court of the Chancery, Tribune placed the blame squarely on Sinclair. It condemned Sinclair’s conduct with regulators, saying the broadcaster tried to sidestep the need to sell stations and failed to make its best effort to obtain prompt regulatory approval of the deal, violating the merger agreement. The $1 billion it’s seeking represents lost stock value.
Ripley shot back in his statement, saying the suit had no merit. He said Sinclair “complied with our obligations under the merger agreement and tirelessly worked to close the transaction.”
The proposed merger had drawn wide-ranging criticism across the political spectrum for how it would give the company access to so much of the nation’s broadcast market. Some competitors worried that the merger would harm competition in the industry, while advocacy groups believed that Sinclair would use the broader platform to further push conservative views, limiting diverse voices on the air.
“The collapse of the merger is great news for dozens of local communities that will be spared Sinclair’s slanted coverage and ridiculous must-runs,” said Craig Aaron, CEO of Free Press, referring to commentary segments produced at the corporate level that Sinclair requires its stations to broadcast. “Millions of people spoke out against this deal, and that public pressure was instrumental in keeping the spotlight on Sinclair.”
Analysts attributed the deal’s demise largely to what they called Sinclair’s “aggressive” stance with regulators related to its need to sell off some stations.
Karyl Leggio, a finance professor at Loyola University Maryland, called the company’s aggressive actions a "misjudgment." She said Sinclair had been set up to succeed by favorable rule changes at the FCC.
In court documents, Tribune said Sinclair initially didn’t even want to sell stations to secure regulatory approval. Sinclair only agreed to divest some stations after Tribune threatened to sue in February. Sinclair subsequently announced plans to shed 23 stations, including 14 owned by Tribune and nine of its own. Some of those deals involved sales to people and entities with close ties to Sinclair.
Last month, FCC Chairman Ajit Pai, long considered friendly to Sinclair, suddenly said he had “serious concerns” about whether the deal would serve the public interest. He also questioned Sinclair’s candor in describing the station sales.
In suing Sinclair, Tribune echoed Pai’s concerns.
In the court filing, Tribune said Sinclair “repeatedly and willfully breached its contractual obligations in spectacular fashion. In an effort to maintain control over stations it was obligated to sell if advisable to obtain regulatory clearance, Sinclair engaged in belligerent and unnecessarily protracted negotiations with [the Department of Justice] and FCC over regulatory requirements, refused to sell stations in specific markets required to obtain approval and proposed aggressive divestment structures and related-party sales that were either rejected outright or posed a high risk of rejection and delay — all in the service of Sinclair’s self-interest and in derogation of its contractual obligations.”
Tribune said Sinclair’s proposals would effectively have allowed Sinclair to maintain control over the stations by transferring them to people with relationships to Sinclair and in some cases no broadcast experience, which would clearly be unacceptable to the FCC. Sinclair, the suit says, continued to haggle, even after being warned by the FCC.
Sinclair has said it’s been transparent about the structure of its related-party sales, which had been approved by the FCC in the past.
In his statement Thursday, Sinclair’s Ripley said: “We unequivocally stand by our position that we did not mislead the FCC with respect to the transaction or act in any way other than with complete candor and transparency.”
Tuna Amobi, a senior analyst at CFRA Research, said Sinclair is known as an aggressive deal maker and overplayed its hand by appearing to try to keep too much control of stations it needed to sell. He said Sinclair has made similar moves to control stations with other acquisitions in the past, but this deal was much larger and likely drew more scrutiny by the FCC.
“I was surprised they were playing such hardball [involving] stations they were supposed to be divesting from,” he said. “Typically, companies would do everything in their power to get the deal done.”
Amobi said he was not surprised that Tribune walked away from the deal since it was unlikely to ever have been approved, but the lawsuit now will cause more trouble for Sinclair.
Amobi and other analysts expect Sinclair and Tribune to seek a settlement rather than fight a protracted court case.
“With Sinclair already on the hook for a breakup fee of about $135 million, we see a significantly larger exposure on the current lawsuit,” Amobi wrote in a research note Thursday that reaffirmed his downgrade of Sinclair’s stock from buy to hold. “Absent a potential settlement, the suit could also detract from management's focus on day-to-day operations.”
Sinclair has already seen its stock price drop about $9 a share since January, when there was optimism about the Tribune acquisition. On Thursday, its shares initially fell but rebounded in the afternoon, rising 2.6 percent to close at $27.80 each.
Nils Tracy, financial analyst for Event Driven at Reorg Research, which provides analysis on mergers and acquisitions, called the eye-popping $1 billion claim aggressive. Tribune shares closed Thursday at $34.60 each, up nearly 3 percent for the day, but also down about $9 from their January peak.
Any settlement would likely be for a lot less than $1 billion, Tracy said, but the amount still could sting Sinclair significantly. He said Tribune’s case isn’t clear-cut because Sinclair did find buyers for the stations, even though the sales might not have won approval from the FCC.
Leggio agreed that the sides would settle for less than Tribune’s claim. Sinclair, she said, will have to pay something to Tribune, which could hurt in the short term. Long term, the industry will continue to consolidate and Sinclair will still be looking to buy more stations — possibly even from Tribune.
“Often when mergers fall apart, there is a lot of bad blood, but it’s not unheard of; think of Jos. A. Bank and Men’s Warehouse,” she said of that 2014 merger after months of acrimony. “Sinclair will be on the offensive to acquire more stations, but I think this time it will be a bit more cautious.”