Harsh FCC Tone Signals Rough Road for Sinclair's Tribune Deal

(Bloomberg) -- Sinclair Broadcast Group Inc.’s tough path to approval for buying Tribune Media Co. grew even more difficult after regulators slammed the proposal as dishonest and potentially illegal in unusually harsh language.

Federal Communications Commission Chairman Ajit Pai on Monday called for sending the $3.9 billion deal to a hearing. The proposed order is said to mention possible misrepresentations or lack of candor regarding Sinclair’s proposed sale of WGN-TV to a car dealer who is a business associate of a top Sinclair executive.

“The candor question changes everything,” Gigi Sohn, a former FCC official, said in an interview. Sinclair could change details around divestitures that attracted Pai’s scrutiny, but a hearing before an administrative law judge would be needed to decide truthfulness of past representations, Sohn said.

“I have serious concerns,” Chairman Ajit Pai’s Monday said. Pai said some of Sinclair’s proposed station divestitures “would allow Sinclair to control those stations in practice, even if not in name, in violation of the law.”

The tone was unusually severe for the telecommunications regulator and suggests Sinclair will have a difficult time getting the $3.9 billion deal back on track.

B. Riley FBR Inc. analyst Barton Crockett said he’s never seen such “harsh” language from the FCC about an applicant for a merger. The “vitriolic” tone of the FCC statement makes it dubious that Sinclair and Tribune will be able to come back with a way of divesting stations to meet ownership limits that will satisfy the FCC, Crockett said in a note.

Sinclair denied in a statement Monday “in the strongest possible manner” any misrepresentations or lack of candor. “We have been completely transparent,” said Ronn Torossian, a spokesperson for the Maryland-based broadcaster.

Sinclair dropped for a second day and was down 2.7 percent, to $28.33, at 3:20 p.m. New York time. Tribune was up 2.9 percent at $33.05, after dropping 17 percent a day earlier.

Sinclair can revise its divestiture plans in a bid to appease the FCC, but this would likely extend the review into the fourth quarter and may not rule out a hearing, given concerns about Sinclair’s candor, Matthew Schettenhelm, a Bloomberg Intelligence analyst, said in a note.

“Sinclair’s easiest path forward at the FCC isn’t easy at all,” Schettenhelm said. “It likely involves reworking its divestiture plan, which may entail finding new buyers for stations in Chicago, Dallas and Houston.”

That means further delay in a transaction that was proposed in May 2017 and has been revised repeatedly to meet officials’ questions.

Tribune said Tuesday that while it’s “disappointed” by the hearing order, it “expects to work with the FCC to explore ways to address the concerns identified.”

The deal for Tribune’s 42 stations, including major markets such as New York and Miami, would leave Sinclair a top national broadcaster with more than 200 stations.

Others would be sold in order to stay under national ownership limits, though Sinclair would retain involved with some of the stations’ operation. The Texas stations would be purchased by a company formerly controlled by the estate of Sinclair executives’ mother.

Pai said in a statement Monday proposed sales of some stations “would allow Sinclair to control those stations in practice, even if not in name, in violation of the law.”

It’s not clear whether Pai’s stance shows a cooling in his previous support for letting broadcasters share station management, for instance by handling advertisement sales or office support, or providing programming in return for a cut of the revenue. Critics have said such arrangements can amount to evasions of ownership rules; Pai has defended them as helping keep TV stations economically viable.

“We hope it is a big turnaround or awakening by Pai,” Matt Wood, policy director for the group Free Press that criticizes the sharing arrangements, said in an interview. “It could fall short of that.” Wood said the Chicago and Texas arrangements “seemed especially problematic, and transparently so."

Robert McDowell, a Washington-based partner at Cooley LLP and former Republican FCC commissioner, said Pai’s action shows “that a required divestiture must be a true divestiture.”

The FCC isn’t signaling that shared service arrangements “are now somehow disfavored as a general matter,” McDowell said.

Gus Hurwitz, director of Law & Economics Programming at the International Center for Law & Economics, a policy group, said Sinclair’s difficulties show that the FCC will accept divestitures when needed to trim deals that otherwise would violate limits.

"So long as its not an illusory divestiture, I think parties shouldn’t worry about whether their transactions are going to go through -- but it needs to be a real divestiture,” Hurwitz said in an interview.

©2018 Bloomberg L.P.