NWS News Corporation

By Joe Flint 

Tribune Media Co. terminated its merger agreement with Sinclair Broadcast Group and sued the rival TV-station owner, alleging it failed to make sufficient efforts to get their $3.9 billion deal approved by regulators.

Last month Federal Communications Commission Chairman Ajit Pai said he had serious concerns about Sinclair's submissions as part of the agency's review, and sent the matter to an administrative law judge, a severe blow to the merger's approval chances.

The suit, filed in Delaware Chancery Court, seeks $1 billion of lost premium to Tribune stockholders and additional damages. Tribune alleges Sinclair breached the merger agreement by engaging in "unnecessarily aggressive and protracted negotiations" with regulators over their requirement that Sinclair divest stations in certain markets to obtain approval. The deal structures that Sinclair proposed -- which Tribune said were designed to allow it to maintain control over stations -- created risks for the deal in violation of the merger agreement, Tribune alleges.

The merger's collapse and the lawsuit mark a stunning turn of events for a deal that when it was announced in May 2017 seemed to have a strong chance of gaining regulatory approval.

"Our merger cannot be completed within an acceptable time frame, if ever, " Tribune Media Chief Executive Peter Kern said in a statement. "This uncertainty and delay would be detrimental to our company and our shareholders."

Sinclair didn't immediately respond to a request for comment.

During a call to discuss its quarterly earnings Wednesday, Sinclair said it was continuing to work with Tribune to "analyze approaches to the regulatory process that are in the best interest of our companies, employees and shareholders."

After the FCC's move, Sinclair denied that it had done anything to mislead the agency and said its proposed spinoffs were "consistent with structures that Sinclair and many other broadcasters have utilized for many years with the full approval of the FCC."

Tribune could now be back in play. Other companies that were pursuing it along with Sinclair included 21st Century Fox and Nexstar Media Group Inc.

Media watchdogs had challenged the deal because of concerns that it would put too many local television stations under one roof. Sinclair owns more than 170 television stations in mostly midsize and smaller markets, while Tribune has 42 stations in major markets.

The issue that led the deal to hit a roadblock at the FCC was the structure of Sinclair's proposals to spin off TV stations. Mr. Pai, the FCC chairman, said evidence suggested that Sinclair's spinoff proposals would still leave it in practical control of those stations "in violation of the law."

In one proposal, Sinclair said it would sell Tribune's WGN-TV Chicago to Steven Fader for $60 million. That price was seen as far below the station's market value, and Sinclair Chairman David Smith sits on the board of a car-dealership concern where Mr. Fader serves as chief executive.

If Sinclair had maintained ownership of WGN-TV, the fees it could charge for carriage of the station on pay-TV services would be lower than the carriage fees WGN-TV could charge under an independent owner, according to a person familiar with the situation. Tribune believes Sinclair was aiming to structure the transaction so that it could still receive the higher carriage rates, the person said.

"Under these proposed arrangements, Sinclair would continue to reap the lion's share of the economic benefits of the stations it was purportedly `divesting' and would have an option to repurchase the stations in the future," Tribune said in its suit.

Sinclair was given several opportunities to resubmit its spinoff plans but none passed the bar with regulators. Mr. Pai expressed concern about a possible lack of candor on Sinclair's part with regard to the proposed transactions.

Tribune said in its suit that Sinclair had not told the FCC about Mr. Smith's ties to Mr. Fader nor had it provided details about other spinoff partners.

"They violated those obligations in spectacular fashion," said Tribune General Counsel Eddie Lazarus on a call with analysts Thursday.

The Sinclair-Tribune deal also triggered an investigation by the Justice Department into whether station owners violated antitrust law by sharing ad sales information that potentially could lead to higher advertising rates.

Another casualty of the Sinclair-Tribune deal collapse is 21st Century Fox's deal to acquire seven of the Tribune stations from Sinclair for $910 million. Tribune said it had notified Fox it has terminated that agreement. Tribune said no fees are payable by any party.

21st Century Fox and Wall Street Journal parent News Corp share common ownership.

Write to Joe Flint at joe.flint@wsj.com

(END) Dow Jones Newswires

August 09, 2018 12:13 ET (16:13 GMT)

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