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What’s Next for the Other Big Merger: Sinclair-Tribune

WASHINGTON — More than a year after Sinclair Broadcast Group announced plans to acquire Tribune Media, the transaction is still in the midst of regulatory scrutiny, as the FCC goes through a new round of public comment and the Justice Department has yet to sign off on the deal.

The $3.9 billion transaction that would create an unprecedented giant in local broadcasting, as Sinclair would be the largest owner of stations with a reach of almost 59% of the country.

Makan Delrahim, the chief of the Justice Department’s antitrust division, said on Friday that a competitive analysis of the transaction has been completed, but “we haven’t reached an agreement with them on what the final agreement will be for antitrust purposes.”

In April, Sinclair revised its plans to divest some stations as part of its plan to comply with media ownership rules, but that also triggered the FCC to schedule a new period for the public to weigh in on the transaction.

With an initial FCC deadline for comments against the merger last week, public interest groups, some industry trade associations and conservative media outlet Newsmax took aim at Sinclair’s latest merger plan, with some calling it a “sham” and “smoke and mirrors.”

The company argues that its transaction will allow it to invest more heavily in local programming, but critics say that their plan will still leave the broadcaster with influence over many of the stations they plan to divest.

A Sinclair spokeswoman declined to comment, but the company is expected to address criticisms of the merger in the coming weeks. The FCC has set July 5 as the deadline for Sinclair’s response. Critics will then get another shot at responding to Sinclair’s comments, with a deadline of July 12.

At the same time as it seeks approvals for the deal, Sinclair has been a target for media watchdogs, who take issue with right-leaning “must run” op-ed segments that air across all of their current stations. President Trump weighed in after a mash-up of different Sinclair anchors reading from the same script went viral.

“The Fake News Networks, those that knowingly have a sick and biased AGENDA, are worried about the competition and quality of Sinclair Broadcast,” Trump wrote in April. “The ‘Fakers’ at CNN, NBC, ABC & CBS have done so much dishonest reporting that they should only be allowed to get awards for fiction!”

In the midst of all this are some potentially significant changes in the way that the FCC regulates media ownership. A pending court decision could further scramble Sinclair’s plans, while an expected FCC vote could offer some relief.

Here is where the merger stands, and what could be next:

Sinclair-Tribune: Under the plan, Sinclair would ultimately own 215 stations in 102 markets.

As the Justice Department and the FCC have reviewed the transaction, Sinclair has offered multiple revisions of its station divestiture plan. That is needed so Sinclair can come close to falling within media ownership limits and other rules that govern how many stations an entity can own in one market.

Its latest plan calls for divesting 23 stations. It also is seeking to own two top four stations in Indianapolis and in St. Louis, taking advantage of a recent FCC action that relaxed some of its common ownership restrictions.

“While we continue to believe that we had a strong and supportable rationale for not having to divest stations, we are happy to announce this significant step forward in our plan to create a leading broadcast platform with local focus and national reach,” Sinclair’s CEO, Chris Ripley said in April, when its most recent merger plan was announced.

Newsmax: One of the highest profile critics of the Sinclair-Tribune transaction is Newsmax, the conservative news outlet whose CEO, Chris Ruddy, has raised questions not only about Sinclair’s influence on the divested stations, but about the process by which the FCC has taken to review the deal.

The FCC set up another round of public comment on Sinclair’s latest divestiture plan, and opponents had until Wednesday to file.

Newsmax raised questions about Sinclair’s plans to sell stations to Cunningham Broadcasting as well as to an LLC set up to buy one of the biggest Tribune properties, WGN-TV in Chicago. In its filing, Newsmax said that “present substantial questions regarding whether Sinclair will actually surrender control of the divested asset and represent ‘sidecar’ divestitures undertaken solely to circumvent the national ownership cap for which there is no public interest precedent.”

Cunningham Broadcasting, it noted, was until very recently owned by the estate of Carolyn Smith, the mother of Sinclair’s controlling shareholders. Voting shares are now owned by Michael Anderson, Cunningham’s president and CEO, but non-voting stock is set up in trusts for the children of Sinclair’s controlling shareholders. But, as Newsmax notes, Sinclair continues to have other ties to Cunningham, including guaranteeing almost $54 million in debt, according to its latest 10-Q filing.

Newsmax also takes issue with the purchase of WGN, noting that the sale would be to a newly formed company headed by Steven Fader, the CEO of Atlantic Automative Corp., a chain of auto dealerships. David Smith, executive chairman of Sinclair, holds a controlling interest in Atlantic Automotive. As it has with other stations, Sinclair also plans to enter into an agreement to provide sales and marketing operations to WGN.

Newsmax contends that because Sinclair also has options to buy back those stations, the divestitures are “sham transactions in which Cunningham and WGN TV LLC are merely warehouses for licenses Sinclair is not legally able to own.”

Other critics: The American Cable Association, which represents small- and medium- sized cable operators, warns that the transaction will give Sinclair increased power over retransmission consent negotiations and will ultimately drive up the cost of station carriage. The ACA is calling for the FCC to “require Sinclair and any purchasers to agree that Sinclair does not ‘acquire’ or ‘obtain control of’ the Tribune stations to be divested.”

The attorneys general of Illinois, Iowa and Rhode Island said in a filing that Sinclair’s plan to sell stations to fall within regulatory limits is “indefinite, does not demonstrate that the divested stations will not be controlled by Sinclair, and withholds the answers to key questions of control of the divested stations from the public and from the Commission.”

A number of groups, including Cinemoi, the International Cinematographers Guild, NABET-CWA, Public Knowledge and the Sports Fans Coalition, outlined a series of other arguments, including that the combined company would reduce localism and diversity. The groups have formed an entity called the Coalition to Save Local Media, and want to FCC to wait on the merger until a federal appeals court rules on a key regulatory provision known as the UHF discount.

UHF discount: Under current regulation, no media entity can amass stations that reach more than 39% of households. Sinclair’s post-merger reach of almost 59% is well above that cap, but media companies have for years been getting a break on that front.

The FCC counts the reach of their UHF holdings as only 50% of their reach, under a rule that was put in place in the 1980s to account for the poorer signals on that part of the spectrum. That allowed not just Sinclair but other stations groups to buy up station properties and still fall within ownership limits.

This is where timing is everything.

In 2016, the FCC got rid of the UHF discount, on the grounds that the rule was outdated. When it came to signal reach, the transition to digital television brought UHF stations into parity, or even better, than VHF outlets.

Then, in 2017,  the new Republican-controlled FCC reinstated the UHF discount, as Chairman Ajit Pai argued that it was repealed without assessing its full impact on other media ownership rules.

In April, a federal appellate court heard a challenge to the FCC’s continued use of the discount. It’s tricky to gauge which way the court will go, but the judges were mighty skeptical of keeping an obsolete rule on the books.

That’s why a number of public interest groups want the FCC to wait until the court decides on the UHF discount before clearing the Sinclair merger. Should the court rule that the FCC has to eliminate it, that could mean Sinclair would be well above the 39% national ownership cap and would be forced to sell many more stations. A lot depends on how the court treats station deals that already are in the pipeline.

But…

National cap: The FCC also is reviewing what to do with the national ownership cap. Broadcasters want it eliminated or, at the very least, to 50% without the benefit of the UHF discount. The latter figure was the figure that broadcast groups like Hearst Television and Scripps Media made to the FCC.

That could have an impact Sinclair’s merger plan, although much would depend on the extent to which existing holdings and transactions are grandfathered. What’s unclear is when FCC will take up the national cap. There have been rumors that the FCC would vote on the proposal at its July meeting, but it did not appear on its agenda for its most recent meeting.

Even if the FCC were to raise the cap, it’s likely to be challenged in court, as there is a debate about whether only Congress can take such an action.

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