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 by Tribune, filed in Delaware Chancery Court on
Thursday, seeks $1 billion of lost premium to its stockholders and
additional damages.
Tribune, which has had other suitors, 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 Sinclair 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 clearing the FCC.
"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."
On Thursday, Sinclair announced a $1 billion share-buyback
program, adding: "It is unfortunate that Tribune Media Company
terminated our merger agreement. Nonetheless, we strongly believe
in the long-term outlook of our company and disagree with the
market's current discounted view on our share price."
Sinclair didn't respond immediately to a request for
comment.
During a call to discuss its quarterly earnings Wednesday,
Sinclair had 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."
Sinclair is known in its industry for being a tough negotiator.
But after the FCC's move, the company denied 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. Others that were pursuing the
Chicago-based company 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 and applied its
fee structure, what it would charge for carriage of the station on
pay-TV services would be lower than the fees WGN-TV could command
under an independent owner, according to a person familiar with the
situation. Tribune believes Sinclair was aiming to structure the
transaction so that the station 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.
While Sinclair was given several opportunities to resubmit its
spinoff plans, Mr. Pai expressed concern about a possible lack of
candor on the company'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.
Maryland-based Sinclair and its chairman, David Smith, have long
been known as aggressive operators with sharp elbows, as the
family-owned business grew from one station in Baltimore into a
media behemoth. And that the company took a hard ball, rather than
conciliatory, approach with regulators didn't surprise industry
insiders.
In 2016, the FCC fined Sinclair $9.5 million for not negotiating
in good faith after satellite broadcaster Dish Network Corp. filed
a complaint about the company over a programming deal gone wrong.
Last year, the FCC hit Sinclair with a $13.4 million fine for
failing to label programming it aired as sponsored content.
The Sinclair-Tribune deal also triggered a broader 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 14:11 ET (18:11 GMT)
Copyright (c) 2018 Dow Jones & Company, Inc.
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