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How Hubris Cost Sinclair Its Acquisition of Tribune

WASHINGTON — A number of big media mergers have been scrapped in the face of regulatory opposition. The Sinclair-Tribune transaction didn’t just get canceled; it had a spectacular crash and burn.

The $3.9 billion combination would have created a dominant broadcast giant with more than 200 stations across the country, allowing Sinclair to scale up and greatly expand its reach in top 10 markets. Many speculated that Sinclair’s ambitions included launching a conservative news alternative to Fox News — even President Trump gave some credence to that in a recent tweet.

Instead, Tribune backed out of the deal and filed a $1 billion lawsuit on Thursday, accusing Sinclair of breaching its obligations to submit to necessary divestitures and other steps to get the deal cleared by federal regulators. The scrutiny on Sinclair’s business practices based on the details spelled out in Tribune’s complaint comes at a bad time for the Baltimore-based broadcaster.

The Justice Department is reportedly investigating Sinclair, Tribune and other broadcast groups for potential antitrust violations. Some public interest groups have raised the possibility of challenging Sinclair’s existing licenses, based on the FCC’s claim that the company may have misrepresented the nature of its merger plans. FCC rules stipulate that broadcast licensee holders like Sinclair must be individuals or entities of “good character” in order to use the public airwaves.

Sinclair on Thursday denied that it misled the FCC, or that it breached its merger agreement with Tribune. It continued to insist that the merger would have been in the public interest, as it would have advanced a new television standard and increased local news programming.

Tribune’s lawsuit, filed in Delaware Chancery Court, gives a glimpse of how the merger went wrong.

While public interest groups, news watchdogs and other conservative outlets were lined up to lobby against the transaction, according to the lawsuit, Tribune was at odds with Sinclair over the way it carried out the merger review. Tribune first considered suing Sinclair in February when Sinclair dragged its heels submitting its divestiture plan to the Justice Department and FCC.

Some highlights from the complaint:

‘Belligerent’ toward DOJ, FCC. At the heart of Tribune’s lawsuit is that Sinclair “engaged in belligerent and unnecessarily protracted negotiations with DOJ and the FCC over regulatory requirements.” A government source tells Variety that attorneys at the Antitrust Division were almost immediately put off by the arrogance of the Sinclair team.

Tribune claims that Sinclair rejected “clear paths to regulatory approval,” and instead “fought, threatened, insulted, and misled regulators in a misguided and ultimately unsuccessful attempt to retain control over stations that it was obligated to sell.”

According to the lawsuit, Tribune says that Sinclair could have secured the DOJ approval by selling stations in 10 markets, as the Antitrust Division had identified those as problematic when it came to marketplace power. Sinclair, though, refused to do so, and instead “invited litigation” over the divestitures, and “went so far as to threaten to file its own lawsuit against DOJ.”

The Delrahim letter. Tribune claims that Sinclair didn’t help things by challenging the way that Antitrust Chief Makan Delrahim was reviewing the proposed transaction.

Included in the lawsuit is a Dec. 31, 2017 letter from Sinclair attorney William Kolasky, to Delrahim, in which he notes that the FCC under Chairman Ajit Pai has relaxed ownership rules in response to changes in the business, but the Antitrust Division has been “unwilling to recognize how completely the world has changed.” His point was that broadcasters have to be measured against the increased competition from online platforms and cable, not solely broadcast stations in a market.

Tribune, though, said that the letter instead proved to “antagonize” DOJ officials, and that the approach was “as unhelpful as it is now ironic.”

Soured partnership. By December of last year, it was clear that relations between Sinclair and Tribune were frayed. In a letter to Sinclair’s general counsel on Dec. 18, Tribune’s general counsel Edward Lazarus wrote that the merger agreement “plainly requires” Sinclair to accept a DOJ offer to green light the transaction by selling stations in 10 markets where the companies’ holdings overlap. He said that the DOJ also offered to “pause” the merger investigation if Sinclair agreed to sell seven stations while they negotiated on the rest.

Instead, Lazarus wrote, Sinclair’s response was to refuse the offers and express an intention to litigate.

Sinclair’s general counsel, Barry Faber, contended that Lazarus misunderstood what the DOJ was offering, and that the Antitrust Division wanted to see the sale of more than just the stations in 10 markets, but divestiture in four other large markets as well. Tribune claims that excuse was “patently false.”

According to Tribune, the companies met with Delrahim on Jan. 25, and he again said that the merger would clear if stations were sold in the 10 markets.

Sinclair, according to the lawsuit, “offered sales in just four DMAs and declared that it intended, and indeed welcomed the opportunity, to litigate with DOJ. Underscoring Sinclair’s willful breach, Mr. Faber in fact told …Delrahim: ‘sue me.'”

Before leaving the Justice Department after the meeting, Faber told Lazarus that Tribune would have to sue Sinclair to get them to divest those stations in the 10 markets, according to the lawsuit, and Tribune almost did the next month. It stopped when Sinclair said that it would eventually agree to divest the stations in the 10 markets if necessary.

“Not surprisingly given its conduct up to that point, Sinclair nevertheless kept right on haggling with DOJ over the divestiture of a subset of stations,” Tribune claims.

At a Feb. 13 meeting at the DOJ, Sinclair’s Faber continued to press for fewer than the 10 divestitures, and accused the DOJ and Delrahim of “completely misunderstand[ing] the industry,” while calling Delrahim “more regulatory than anyone before you, under any other president for 21 years,” according to the lawsuit.

The haggling continued, according to the lawsuit. Although Sinclair and the DOJ agreed to a term sheet in April, they never reached a definitive settlement.

Showing its cards: Tribune claims that Sinclair’s refusal to agree to the DOJ demands also delayed the FCC’s review. It first submitted its merger documents to the FCC on June 26, 2017, but did not include a plan for divestitures in certain markets.

“Sinclair pointedly chose not to show any of its divestiture cards at the FCC because, as subsequent events demonstrated, it intended to resist DOJ’s divestiture requests aggressively and did not want to risk signaling through its FCC filings that it would be willing to make any divestitures — in the apparent belief that doing so would reduce its perceived leverage at DOJ,” Tribune contends.

The FCC, though, stopped its 180-day review clock as Sinclair still needed to submit a sufficient plan to divest stations.

But as Tribune describes it, Sinclair delayed the proceedings unnecessarily by making a series of proposals in which a number of stations would be put in trusts, to be sold at a later date, and other plans in which stations would be sold to entities with substantial ties to Sinclair management.

An example: Sinclair planned to sell WGN in Chicago to an LLC owned by Steven Fader, a car dealer with business ties to David Smith, Sinclair’s executive chairman.

“Fader had no broadcast experience, which was precisely why Sinclair chose him to ‘purchase’ WGN: under Sinclair’s retransmission consent agreements with various cable and satellite providers, Sinclair would lose tens of millions of dollars annually in WGN revenue if Sinclair ever owned WGN,” the lawsuit claims. “The most self-serving way of preserving that revenue was to sell WGN to a newcomer who could step into the shoes of Tribune’s very favorable distribution agreements while kicking back the preserved profits to Sinclair.”

The FCC warned Sinclair to avoid such transactions and make only “clean” sales, according to Tribune.

Instead, Sinclair went forward with the proposal. But some of its opponents raised red flags, noting the ties that Fader had to Smith. Another proposed buyer of stations was Cunningham Broadcasting, but that company also has ties to Smith and even has Sinclair as a guarantor of some of its debt. Tribune noted that Sinclair also failed to disclose “the sale in early 2018 of Cunningham’s voting shares to a close Sinclair associate, and the suspiciously cheap option to buy those shares given to members of Smith’s family.”

On July 16, Pai announced that he had “serious concerns” with the merger, and started the process of sending the transaction to an administrative judge for review.

“The die was cast – Sinclair had run out of options for proposing an approvable transaction to the FCC, and any hope of obtaining the FCC’s approval of the Merger before the August 8 End Date was dead,” according to Tribune.

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