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Sinclair's fumbles imperil mega-merger
The Federal Communications Commission's (FCC) rejection of Sinclair Broadcast Group's $3.9 billion merger with Tribune Media is a striking reversal of fortune for the conservative media conglomerate.
The company was thought to have a reliable ally in the agency's chairman, Ajit Pai, and a clear path to getting merger approval.
But the FCC voted 4-0 Wednesday to refer the deal to an administrative law judge, a process widely seen as a deal-killer.
The deal's prospects were unraveled by Sinclair's plan to divest certain stations around the country to bring the combined company in line with media ownership restrictions.
The agency cited questionable deals that involved Sinclair selling stations to friendly buyers for low prices while still retaining significant control over operations and programming.
Their order also scolded Sinclair, accusing it of misleading regulators and failing to disclose information about the nature of the deals.
The moves have sparked a slew of questions over the future of the merger and what it heralds for other mega-deals.
The deal has long been the center of controversy.
"Maybe the companies wore out their welcome mat at the FCC?," Michael Copps, a former Democratic FCC commissioner, told The Hill in an interview.
"It's become hot coal for the FCC to handle."
The surprising shift came after Pai's FCC spent over a year rolling back media ownership regulations, an agenda that Democrats say was specifically aimed at benefiting Sinclair's efforts at consolidation.
"For too long the @FCC has twisted & bent its policies to serve the business plans of Sinclair Broadcasting," Democratic FCC Commissioner Jessica Rosenworcel said in a tweet Thursday. "As I've said before, this is not right. I'm glad my colleagues now agree & have supported halting the Sinclair-Tribune merger with this hearing."
In April 2017, the FCC voted to reinstate a rule that effectively allows media conglomerates to buy up more local television stations without running afoul of the media ownership cap. A few weeks later, Sinclair announced the Tribune merger, which would give it control of more than 200 stations touching over 60 percent of households.
In another move that was seen as a gift to Sinclair, the FCC later rolled back restrictions on local television consolidation and against companies owning both a TV broadcaster and a newspaper in the same market.
Earlier this year, it was revealed that the FCC's inspector general had opened an investigation into whether Pai was showing favoritism to Sinclair and expansion plans.
Most critics had assumed the agency was prepared to approve the deal.
"The Chairman evaluates mergers based on the facts specific to each one," Tina Pelkey, a spokeswoman for Pai, said in an email to The Hill. "The Order clearly lays out the concerns the Chairman had with the merger."
Pai's announcement on Monday that he had "serious concerns" about the deal stunned observers and sent Sinclair's stocks on a downturn, with prices falling more than 20 percent over the following days.
Some analysts thought Sinclair had pushed the envelope too far, angering regulators.
"Sinclair had a huge opportunity to execute on a transformative [mergers and acquisitions] transaction," Patrice Cucinello, an analyst with Fitch Ratings, said in a note. "Instead, Sinclair chose to push the boundaries relative to the existing regulatory framework instead of playing it safe with required station divestitures."
In order to bring itself in line with restrictions on media consolidation, Sinclair had proposed a number of divestitures that raised red flags for regulators. One of the deals involved selling two television stations in Texas to a company called Cunningham, which was effectively controlled by Sinclair and its executives.
Another proposed sale was the transfer of the highly valuable WGN-TV station in Chicago. Sinclair would have sold the station to a Maryland businessman named Steven Fader for a price that the FCC said "appeared to be significantly below market value." Also of concern to the agency were the close ties between buyer and seller: Fader is the CEO of an auto dealership in which Sinclair executive chairman David Smith owns a controlling stake.
That proposal raised eyebrows at the FCC.
"Specifically, we question the legitimacy of the proposed sale of such a highly rated and profitable station in the nation's third-largest market to an individual with no broadcast experience, with close business ties to Smith, and with plans to own only the license and minimal station assets," the FCC said.
The fate of the merger is still unclear.
A lengthy administrative law process could hurt both Sinclair and Tribune and spell doom for the deal.
Sinclair has not yet responded to the FCC's designation order. Tribune, on the other hand, appeared to be more rattled by the agency's decision.
"Tribune Media has now had the opportunity to review the FCC's troubling Hearing Designation Order," the company said in a statement on Thursday. "We are currently evaluating its implications and assessing all of our options in light of today's developments."
While the FCC's decision is a blow to Sinclair, experts said it was unlikely to hamper other potential deals.
The media marketplace has seen companies hunting for other mega-deals.
Copps, the former FCC commissioner, said there was no sign the decision would change the calculations of other companies in a heavily consolidating marketplace.
"It's positive news that they sent this to an administrative judge for a hearing, but to think this addresses the problem of industry consolidation is erroneous," said Copps.
"This is still - and nobody should doubt it - a pro-consolidation Federal Communications Commission."