How Sinclair’s Rise in Prominence Ended in Fall for Shareholders

(Bloomberg) -- For a powerful media mogul hoping to keep a low profile, David Smith has the ideal name -- common, spice-less and forgettable. Perfect, in other words, for flying under the radar. And for years, Smith and the company that he runs, Sinclair Broadcast Group Inc., did just that.

But recently that dynamic has been flipped on its head. Over the past couple of years, thanks in large part to the company’s unorthodox practice of injecting staunch right-wing political views into its local newscasts, Sinclair and Smith have attracted vast amounts of national media attention. HBO’s “Last Week Tonight with John Oliver” did an exhaustive 19-minute segment, while Deadspin produced a short video entitled, “Sinclair’s Soldiers in Trump’s War on Media,” that spread across the web.

Now, all the unwanted attention appears to be taking its toll.

On Thursday, after months of intense scrutiny from regulators, progressive activists, elected politicians and media watchdog groups, Sinclair’s long-pending deal to acquire Tribune Media Co. officially fell apart. In an emailed statement, Tribune announced it was pulling out of the $3.9 billion transaction and filing a lawsuit in Delaware Chancery Court against the would-be buyer, seeking the damages for losses incurred as a result of “Sinclair’s material breaches” of the merger agreement.

FCC Position

It was the final blow to a deal that had begun unraveling weeks earlier. On July 18, following a lengthy review, the Federal Communications Commission had sent the proposed acquisition to a hearing by the agency’s administrative law judge. Such proceedings can drag on for months and often spell the coming of the end for a star-crossed merger. “This uncertainty and delay would be detrimental to our company and our shareholders,” Tribune Chief Executive Officer Peter Kern said in the statement.

For Sinclair, it was a surprising turn of fate. Only recently, the company had enjoyed a close relationship with FCC Chairman Ajit Pai; and the company’s history has been marked by one successful acquisition after another. So what went wrong?

Blame Sinclair’s faltering stealth mode.

Decades ago, with little fanfare, Smith pioneered an effective workaround that helped Sinclair skirt an FCC rule prohibiting any single company from owning more than one station in a given market. At the time, in the 1990s, David Smith’s mother, Carolyn Smith, became the majority owner of a company called Glencairn Ltd. Whenever Smith needed to acquire or divest a station with geographic overlap, Glencairn would buy it, then sign a “local marketing agreement,” effectively turning control of the station back to Sinclair.

Hidden Buyer?

Rivals occasionally complained that the arrangement was anti-competitive. But the objections never triggered much attention outside of the industry, and Sinclair continued to set up these lucrative, so-called sidecar stations without sustaining any major damage to its broader ambitions.

Until now.

In its surprising (and ultimately fatal) decision in July, the FCC zeroed in on Sinclair’s plans for divesting certain Tribune stations. The FCC questioned whether Sinclair was, in fact, the hidden buyer in a proposal to sell Chicago’s WGN-TV to an automobile executive with no previous broadcast experience but with ties to the Smith family. The proposed buyers of other stations also raised concerns. In its letter to the judge, the FCC accused Sinclair of misleading the agency while potentially attempting to skirt the ownership rules governing television stations.

‘Complete Candor’

Essentially, Sinclair got tripped up for doing something that it has long done with little consequence. Under the bright spotlights, in other words, the sidecars had sputtered. Sinclair’s tactics may not have changed. But its visibility had.

In a statement, Sinclair CEO Chris Ripley said,“We unequivocally stand by our position that we did not mislead the FCC with respect to the transaction or act in any way other than with complete candor and transparency.”

Now Sinclair will have to decide how best to adjust. During an earnings call on Wednesday, Sinclair executives said that regardless of the outcome with Tribune, the company is still looking to buy more broadcast stations or regional sports networks. Sinclair is also reportedly launching a streaming news service that is seen as a competitor to Fox News.

Chew Toy

None of which sounds likely to dampen media watchdogs’ interest in their favorite new chew toy.

Not surprisingly, following Tribune’s announcement, plenty of activist groups sent out press releases celebrating the outcome. Among the rush: The American Civil Liberties Union thanked the “thousands of activists that raised their voices to prevent the damage this deal would have done.” Allied Progress sent out an email to the media with the subject: “Victory: Sinclair Merger Dead.” And a group called CREDO Action blasted out a statement noting that its petition to block Sinclair’s deal had been signed by more than 200,000 people.

The messages varied in their particulars. But they shared one sensibility in common. Nobody sounded like they were going to forget David Smith’s name, or Sinclair’s, anytime soon.

©2018 Bloomberg L.P.