FCC Says Sinclair May Have Misrepresented Tribune Merger Details

Sipa USA via AP

WASHINGTON — The FCC asserts that there are “material questions” of whether Sinclair Broadcast Group engaged in “a potential element of misrepresentation or lack of candor” in its effort to secure FCC approval of its $3.9 billion buyout of Tribune Media.

The FCC’s claims are made in an order, made public on Thursday, to send the the merger to an administrative law judge for review. The FCC voted 4-0 to take such an action, which will further delay the transaction and could jeopardize the deal altogether.

Sinclair has denied those claims.

Sinclair made a last-minute effort to revise its station divestiture plan, and perhaps salvage its $3.9 billion acquisition, to address the FCC”s concerns.

But the FCC order makes clear that those revisions do not mollify its concerns, as issues with misrepresentation remain.

“Given the seriousness of the issues presented, we direct the Media Bureau to hold in abeyance all other pending applications and amendments thereto related to the overall proposed Sinclair-Tribune transaction until the issues that are the subject of this Hearing Designation Order have been resolved with finality,” the FCC said.

Tribune raised the specter of possibly pulling out of the deal in a statement issued in response to the FCC’s order.

“Tribune Media has now had the opportunity to review the FCC’s troubling Hearing Designation Order. We are currently evaluating its implications and assessing all of our options in light of today’s developments. We will be greatly disappointed if the transaction cannot be completed, but will rededicate our efforts to running our businesses and optimizing assets,” Tribune said in a statement.

The FCC zeroed in on the business ties between Sinclair chairman David Smith and businessman Steven Fader in connection with the plan to sell Tribune’s WGN-TV Chicago to a new entity controlled by Fader for $60 million. That plan raised hackles from merger opponents because the purchase price was so far below fair market value for a Chicago TV station. Fader is CEO of Atlantic Automotive Group, in which Smith has an equity interest and also sits on its board. The commission’s order noted that Fader had no prior broadcast TV experience, and the transaction was structured as to give Sinclair sway over the station’s operations.

“Sinclair would have owned most of WGN-TV’s assets, and pursuant to a number of agreements, would have been responsible for many aspects of the station’s operation. Finally, Fader would have purchased WGN-TV at a price that appeared to be significantly below market value, and Sinclair would have had an option to buy back the station in the future. Such facts raise questions about whether Sinclair was the real party in interest under Commission rules and precedents and attempted to skirt the Commission’s broadcast ownership rules,” the FCC said in the order. (The complete order can be found here.)

The order also questions Sinclair’s proposal to sell Tribune’s stations in Dallas (KDAF-TV) and Houston (KIAH-TV) to Cunningham Broadcasting, another company with ties to Sinclair and the Smith family. It wants the administrative judge to determine if these were “sham” transactions, with the sales prices well below market rate.

“We note that Sinclair represented to the Commission that it would comply with our broadcast ownership rules by seeking approval of its application—in part based on the proposed divestitures to Cunningham and Fader—and did not fully disclose facts such as the pre-existing business relationships between Fader, Smith, and Sinclair nor the full entanglements between Cunningham, Smith, and Sinclair,” the FCC said in the order.

The administrative hearing could add several months, and maybe much longer, to regulatory approval of a merger that has already experienced a number of bumps in the road.

FCC chairman Ajit Pai announced earlier this week that he had “serious concerns about the Sinclair/Tribune transaction.” He said that “the evidence we’ve received suggests that certain station divestitures that have been proposed to the FCC would allow Sinclair to control those stations in practice, even if not in name, in violation of the law.”

Sinclair’s revised plan calls for it to acquire WGN-TV Chicago as part of the larger transaction. Sinclair is proposing that KDAF-TV and KIAH-TV will be put into a divestiture trust and sold in an arm’s-length transaction by an independent trustee after the Tribune sale is closed.

Sinclair spokesman Ronn Torossian said on Wednesday, “While we understand that certain parties, which oppose the transaction object to certain of the buyers based on such buyers’ relationships with Sinclair, at no time have we withheld information or misled the FCC in any manner whatsoever with respect to the relationships or the structure of those relationships proposed as part of the Tribune acquisition. Any suggestion to the contrary is unfounded and without factual basis.”

The Sinclair-Tribune deal has stirred opposition from many quarters, given that it would make Sinclair by far the nation’s largest TV station owner with more than 200 stations under one roof.

Sinclair has been under pressure to sell stations to company with federal TV station ownership rules.

It has identified 23 stations for sale, but its divestiture plans have gone through multiple revisions and have been the target of critics and other media entities, including Newsmax, as well as the American Cable Association.

Initially, the company planned to sell WPIX-TV New York and WGN-TV at below-market prices to entities with ties Sinclair. In April, Sinclair revised that plan, deciding to keep WPIX, but sell WGN-TV to Fader and KDAF, and KIAH to Cunningham Broadcasting, which has ties to Sinclair executives.

Sinclair already has an agreement to sell nine medium-sized market stations to Fox Television Stations after the Tribune deal closes. Fox is unlikely to be a contender for the Dallas or Houston stations because it already owns two stations in both of those markets.

The Department of Justice also must approve the deal.

FCC Commissioner Michael O’Rielly has been critical of the administrative hearing process, noting that it has “typically meant a de facto merger death sentence, even if such referral could eventually be proven to be unjustified. ” But he said that he voted for the order after securing changes that establish a time frame for the review. The administrative judge will have to set a complete schedule.

“This is what some may refer to as an initiation of a hint of due process,” he said. “At the same time, I am less than sanguine that this effort will be of extended value, as I realize that many merger applicants will be unable to withstand the market pressures to end transactions long before any such timelines are established or exhausted.”

Commissioner Jessica Rosenworcel wrote on Twitter, “For too long the FCC has twisted & bent its policies to serve the business plans of Sinclair Broadcasting. As I’ve said before, this is not right. I’m glad my colleagues now agree & have supported halting the Sinclair-Tribune merger with this hearing.”