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Tribune Abandons Sinclair Deal -- WSJ

10/08/2018 8:02am

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By Joe Flint 

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (August 10, 2018).

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.

The merger's collapse and the lawsuit mark a stunning turn of events for a deal that when it was announced seemed to have a strong chance of clearing the FCC, which assesses whether media mergers serve "the public interest."

Sinclair, which owns more than 170 television stations in mostly midsize and smaller markets, and Tribune, with 42 stations in major markets, announced their deal in May 2017.

Tribune, which has had other suitors, alleges in its suit that 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.

"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. "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 CEO Chris Ripley said in the announcement.

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.

In afternoon trading, Tribune shares were up 3.6% at $34.87, while Sinclair was ahead 2.4% at $27.75.

Media watchdogs had challenged the deal because of concerns that it would put too many local television stations under one roof. But 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 were to maintain ownership of WGN-TV what it would receive in distribution fees from pay-TV distributors would be less than what WGN-TV receives now. That's because as acquirer, Sinclair's "rate card" would be used for WGN-TV. However, if the license was transferred to an owner with no other broadcast properties or pre-existing rate card, the WGN-TV fees would stay in place, a person familiar with the matter said. Because WGN-TV has a heavy load of sports programming, it commands higher average fees from pay-TV distributors who carry it.

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.

Corrections & Amplifications Tribune Media's merger agreement with Sinclair Broadcast Group was announced May 2017. An earlier version of this article incorrectly stated the agreement was announced April 2016.

Write to Joe Flint at joe.flint@wsj.com

 

(END) Dow Jones Newswires

August 10, 2018 02:47 ET (06:47 GMT)

Copyright (c) 2018 Dow Jones & Company, Inc.

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