For Sinclair, Ruling on TV Limits May Be Too Late for Tribune

(Bloomberg) -- A U.S. appeals court rejected on technical grounds a challenge to Federal Communications Commission ownership rules that could ease the path for Sinclair Broadcast Group Inc.’s proposed purchase of Tribune Media Co. -- if the deal goes forward.

The Washington-based court on Wednesday dismissed a lawsuit from opponents without considering its merits, ruling the activist groups that filed it hadn’t shown they would be injured by the consolidation at the heart of their case.

While that decision preserves headroom for broadcast mergers, it may have arrived to late for Sinclair’s $3.9 billion acquisition of Tribune -- though could help other suitors for the Chicago-based broadcaster.

“This decision won’t likely breathe new life into Sinclair’s Tribune deal.” said Matthew Schettenhelm, an analyst for Bloomberg Intelligence. “Tribune can walk away from the deal on August 8 -- and it likely will. After this decision, Sinclair still faces a risky and uncertain FCC hearing, while other potential Tribune suitors gain more flexibility to make offers.”

Tribune rose 3.2 percent to $33.90 at 11:36 a.m. in New York, having jumped as much as 5 percent upon news of Wednesday’s court ruling. Sinclair was up 2.69 percent to $26.75 after earlier having reached $26.95. Other broadcasters in the U.S. are also rising, including Tegna, up 1.92 percent, and Nexstar Media Group Inc., up 1.13 percent.

Last week, the FCC said the suburban Baltimore-based buyer may have misled officials about the nature of some of its proposed divestitures and referred the matter to an administrative hearing officer, something that could delay the deal long enough to kill it.

“The court’s decision clears up a secondary problem for Sinclair -- can it fit under the U.S. ownership cap?” Schettenhelm said. “But it does nothing to let the company clear the stumbling block that emerged last week, the FCC decision to call for a hearing on if Sinclair acted with full candor.”

Daniel Kurnos, a Benchmark Co LLC analyst, said that while the UHF ruling was a prerequisite for the deal to have a chance, there are still several unresolved issues that are likely to weigh in on the deal.

“Sinclair can negotiate a settlement with the FCC to address the character issues and restructure the deal, resetting the shot clock,” he said, adding that the move is potentially impossible if the commission isn’t allowed to settle conduct charges.

The analyst said the ruling gives way for other companies like Nexstar and Tegna to pursue Tribune or other consolidations “should the Sinclair deal fall through.”

Companies with less than 30 percent of the national audience, when using the partial-counting method at issue, include TEGNA, Nexstar, CBS Corp., NBC owner Comcast Corp. and ABC owner Walt Disney Co., according to data compiled by Bloomberg.

The appeals court conflict turned on how the regulator counts TV station ownership to determine the percentage of U.S. households reached.

Broadcasters may own stations that reach 39 percent of U.S. households -- but how that audience is measured has been in dispute. Last year, the FCC’s Republican majority reinstated a measure that treats ultra-high-frequency or UHF band stations as counting for just half of their lower-frequency counterparts, enabling broadcasters to own more stations and enjoy greater reach.

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FCC Chairman Ajit Pai, a Republican appointed by President Donald Trump, reinstated the discount in April last year. Sinclair proposed its deal the following month.

Sinclair after absorbing Tribune would fit under the 39 percent limit, using the contested counting method and after some station sales. If it couldn’t use the contested counting method, Sinclair would be large enough to violate the national limit, jeopardizing prospects for approval by the FCC.

In its two-page decision, the court said the FCC had noted the measure’s obsolescence. “The FCC nevertheless reinstated the discount pending ‘a broader review of the [national ownership] cap’ itself; the agency concluded it had erred by eliminating the UHF discount before such a review.”

The three-judge panel was comprised of two Barack Obama nominees, U.S. Circuit Judges Patricia Millett and Nina Pillard, and one Trump selection, Greg Katsas.

The UHF discount fight was led by the advocacy group Free Press.

“We’re disappointed in the court’s ruling, which is based on a technicality and doesn’t consider the merits of the case against the FCC and its arbitrary and indefensible reinstatement of the UHF discount,” Craig Aaron, president of Free Press, said in a statement. “We’re exploring our legal options.”

The FCC’s Pai said he was pleased with the ruling.

Sinclair, which grew from a single TV station in Baltimore in 1971, is trying to leap into nationwide prominence with the deal for 42 Tribune stations in cities including New York. The purchase would lift Sinclair’s station total above 200. It’s being examined by the FCC and by antitrust regulators at the Justice Department.

Sinclair Chief Executive Officer Chris Ripley told investors May 9 that he expected the court to affirm the rule that allows counting just part of the audience. And, he noted, the FCC, with a Republican majority led by Pai, is separately considering raising the national ownership limit.

With Tribune acquired and some stations sold, Sinclair would still reach nearly 59 percent of U.S. households with television, but that figure that falls to under 38 percent when counting just half the audience for some stations, according to a Sinclair filing.

Trump Tuesday night slammed the FCC for failing to approve the deal, calling the move “sad and unfair.”

“Liberal Fake News NBC and Comcast gets approved, much bigger, but not Sinclair,” Trump said in a tweet Tuesday night. “Disgraceful!”

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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