(Bloomberg) -- Sinclair Broadcast Group Inc. dropped after judges questioned a rule change that made way for the broadcaster’s proposed acquisition of Tribune Media Co., raising the possibility of turmoil for the $3.9 billion deal.
Judges at the U.S. Court of Appeals for the D.C. Circuit questioned why the Federal Communications Commission had reinstated a rule allowing owners of some TV stations to count just part of their audience when tallying holdings against a national limit of 39 percent.
The issue is important to Sinclair’s proposed purchase of Tribune, which would leave it covering 72 percent of U.S. households -- or about 45 percent when counting half the audience as allowed under the embattled rule.
Sinclair dropped 4 percent to $29.38 at 1:44 p.m. New York time, and Tribune dropped 3.3 percent to $39.48. Each was down as much as 5.6 percent earlier. A Bloomberg Intelligence index of broadcast shares was down 3.2 percent at 1:29 p.m.
One judge on the three-judge panel likened the FCC’s continuing the audience-counting discount, which is based on limitations from an obsolete broadcast technology, to keeping a moribund body on life support.
Most signs point to an FCC loss in the case, possibly a unanimous one, which sets up a race for Sinclair to close before the decision comes out, said Bloomberg Intelligence analyst Matthew Schettenhelm.
The hearing “went poorly for the FCC," Schettenhelm said in a note. “Sinclair will likely try to race to close the deal with the discount before the court rules, probably in 3Q,” or by the end of September.
If the FCC loses, the court could order the agency to reconsider an approval of Sinclair’s deal, Schettenhelm said.
Wells Fargo analyst Marci Ryvicker said she disagrees that the outcome of the case may pose a risk to the deal. The FCC has a good change of winning, Ryvicker said in a note.
“Even if the FCC does lose, the court cannot ‘force’ the agency to redo its approval of this deal,” Ryvicker said, adding that Sinclair can’t be forced “to unwind the transaction.”
The outcome should have “LITTLE TO NO IMPACT” on the merger, Ryvicker said.
Sinclair is “working to finalize matters” with antitrust regulators who are scrutinizing the deal for its effect on competition at the Justice Department, according to an April 18 filing by the company at the FCC, which also is vetting the merger.
The Maryland-based broadcaster has said it’s willing to sell TV stations to comply with ownership limits. Its purchase as proposed would include 42 Tribune stations, including outlets in New York and Chicago.
Rebecca Hanson, a Sinclair senior vice president, and Tina Pelkey, an FCC spokeswoman, both declined to comment.
The case against the FCC was brought by policy groups that oppose media consolidation. They want the FCC to revert to its earlier stance that counts the entire audience with no discounts.
The FCC under a Democratic chairman eliminated the discount in 2016. It was a relic of days when UHF stations -- broadcasting on channels 14 and higher -- used signals that didn’t reach as far as stations assigned lower-numbered channels. That disadvantage disappeared with the switch to digital TV in 2009.
FCC Chairman Ajit Pai, a Republican appointed by President Donald Trump, reinstated the discount in April last year. Sinclair proposed its deal in May.
The FCC separately is considering whether to keep or eliminate the 39 percent limit and the UHF discount.
The case is Free Press v. Federal Communications Commission, 17-1129, U.S. Court of Appeals, District of Columbia Circuit (Washington).
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