Tribune Media Sues Sinclair, Terminates Merger Agreement

Sinclair Broadcast Group
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UPDATED with Sinclair comment

Tribune Media has filed a $1 billion lawsuit against Sinclair Broadcast Group and bailed out of the long-pending sale agreement in the face of opposition from the FCC and questions about whether Sinclair tried to mislead the government with its divestiture plan.

Tribune cited Sinclair’s “unnecessarily aggressive and protracted negotiations with the Department of Justice and the Federal Communications Commission” in the regulatory review of the merger as the reason for the suit, filed Thursday in Delaware Chancery Court. The complaint reveals that Tribune considered suing Sinclair in February as it became concerned about Sinclair’s approach to dealing with the FCC and Justice Department.

The deal-breaker on the merger came last month, when FCC chairman Ajit Pai announced that he had “serious concerns” about the transaction. The commissioners voted unanimously to send the merger to an administrative law judge for a hearing, a prospect that likely would add months or a year or longer to the review.

“In light of the FCC’s unanimous decision, referring the issue of Sinclair’s conduct for a hearing before an administrative law judge, our merger cannot be completed within an acceptable timeframe, if ever,” said Peter Kern, Tribune Media CEO. “This uncertainty and delay would be detrimental to our company and our shareholders. Accordingly, we have exercised our right to terminate the Merger Agreement, and, by way of our lawsuit, intend to hold Sinclair accountable.”

Sinclair formally withdrew its application to buy the 42 Tribune stations with the FCC on Thursday. The Baltimore-based broadcaster said Tribune’s lawsuit was “entirely without merit.”

“We are extremely disappointed that after 15 months of trying to close the Tribune transaction, we are instead announcing its termination,” said Sinclair CEO Chris Ripley. “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. As Tribune, however commented, in their belief, the FCC’s recent designation of the deal for a hearing in front of an Administrative Law Judge would have resulted in a potentially long and burdensome process and, therefore, pursuing the transaction was not in the best interest of their company and shareholders. As for Tribune’s lawsuit, we fully complied with our obligations under the merger agreement and tirelessly worked to close this transaction. The lawsuit described in Tribune’s public filings today is entirely without merit, and we intend to defend against it vigorously.”

The $3.9 billion transaction, set in May 2017, would have combined two of the country’s largest broadcasters into a giant with more than 200 stations. Public interest groups lined up against the merger and Democrats contended that Sinclair was trying to infuse local stations with a conservative bent.

The decision to abandon the merger immediately raises the prospect of other suitors for Tribune Media. Industry sources speculate that the company may wind up selling off its assets in piecemeal fashion. Fox Television Stations had already cut a deal with Sinclair to acquire 7 of Tribune’s Fox affiliate stations for $910 million as part of its divestiture plan.

Tribune asserted Thursday that Sinclair violated the terms of the agreement that called for Sinclair to make a good-faith effort to comply with regulatory requirements to close the deal as quickly as possible.

“Sinclair’s entire course of conduct has been in blatant violation of the Merger Agreement and, but for Sinclair’s actions, the transaction could have closed long ago,” Tribune said.

The FCC claimed that Sinclair engaged in “a potential element of misrepresentation or lack of candor” in its effort to secure government approval. That centered on the way that Sinclair laid out its plans to divest certain stations, a necessity if it was to comply with media ownership limits.

Tribune’s complaint offers great detail on what it characterizes as Sinclair’s repeated failure to accept divestiture conditions from the DOJ that would have allowed the deal to close by the first quarter of this year.

“From virtually the moment the Merger Agreement was signed, Sinclair repeatedly and willfully breached its contractual obligations in spectacular fashion. In an effort to maintain control over stations it was obligated to sell if advisable to obtain regulatory clearance, Sinclair engaged in belligerent and unnecessarily protracted negotiations with DOJ and the FCC over regulatory requirements, refused to sell stations in the ten specified markets required to obtain approval, and proposed aggressive divestment structures and related-party sales that were either rejected outright or posed a high risk of rejection and delay – all in the service of Sinclair’s self-interest and in derogation of its contractual obligations,” the complaint states.

Among other things, the FCC zeroed in on the business ties between 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 sparked concern 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 denied that it misrepresented the facts in its merger filings.

Sinclair’s ties to President Trump had been an issue throughout the regulatory process, and Trump publicly expressed his unhappiness at the FCC for failing to approve it. He called it “sad and unfair,” and added, “This would have been a great and much needed Conservative voice for and of the People. Liberal Fake News NBC and Comcast gets approved, much bigger, but not Sinclair. Disgraceful!”

One of Trump’s former communications spokespersons, Boris Epshteyn, is chief political analyst at Sinclair.

Pai, who Trump appointed as FCC chair, told a congressional hearing that he stood by the decision, and last week he said that he has not had any contact with the White House following the president’s tweet.

The merger was first inked in May 2017, and the transaction almost immediately became a focus of a lobbying battle in D.C. As Sinclair defended the transaction as necessary consolidation in the face of competition from cable and tech, opponents waged social media campaigns. Some other conservative news outlets, like Newsmax, The Blaze and One America News Network, publicly opposed the transaction.

Now that the merger is off, some public interest advocates say that the way that Sinclair conducted its regulatory push raises issues of whether its existing broadcast licenses should be reviewed.

Craig Aaron, president and CEO of the public interest group Free Press, said that “it’s reasonable to question whether the broadcaster deserves to hold any licenses to profit off the public airwaves.”

Another opponent of the merger, Gigi Sohn, a distinguished fellow at Georgetown and former FCC official, said that the allegation about Sinclair’s merger filings “raises a legitimate question as to whether Sinclair is fit to be a broadcast licensee at all, not just a licensee of Tribune’s stations.

“This transaction had but two supporters – Sinclair and Tribune,” she said in a statement. “It was opposed by large and small cable companies, rural broadband providers, conservative cable channels and the public interest community.”

An FCC spokesman said they had no comment.

Last week, Pai, citing the review by the administrative judge, declined to say whether alleged misrepresentations by Sinclair should or would have an impact on its existing broadcast licenses. Sinclair filed a motion to terminate the administrative hearing, in light of its withdrawal of the merger applications.

Sinclair and Tribune also are reportedly among the station groups being investigated by the Justice Department for potential antitrust violations related to the sharing of information by ad sales teams. The probe was triggered by the DOJ’s review of the merger, and it is also the subject of several class action lawsuits.

Tribune v Sinclair by Anonymous bI1uhqCaYm on Scribd