Sinclair Tribune

In a move that could give the Federal Communications Commission political cover if it chooses to advance further media ownership deregulation in the coming quadrennial review, FCC chair Ajit Pai has thrown a high-profile TV merger into doubt.

In a surprise announcement on Monday, Pai said he has “serious doubts” about Sinclair Broadcast Group’s $3.9 billion takeover bid for Tribune Media. The combination would give the company 215 television stations nationwide—reaching 72% of U.S. households —as well as Chicago’s venerable news-talk WGN (720). Sinclair has worked to fine-tune the deal since it was announced in May 2017 to win regulatory approval, including an agreement to spin-off 23 TV stations in 18 markets to comply with ownership limits. But several of the potential bidders had ties to Sinclair, such as Dallas and Houston stations buyer Cunningham Broadcasting, which is controlled by the estate of Sinclair CEO David Smith’s mother, Carolyn Smith. And in other cases the company has said it plans to use joint sales agreements and shared services agreements with the stations it plans to sell. That’s given critics on both sides of the political aisle fresh ammunition to target the deal.

Pai said after a “thorough review” of the record, he now shares those concerns. “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,” he said in a statement. “When the FCC confronts disputed issues like these, the Communications Act does not allow it to approve a transaction. Instead, the law requires the FCC to designate the transaction for a hearing in order to get to the bottom of those disputed issues.”

The merger has already proven politically troublesome for Pai. FCC inspector general David Hunt opened an investigation in February into whether Pai and his top aides had improper contact with Sinclair executives in the weeks leading up to the announcement of the Tribune buyout. That includes discussions about a move to revert to an earlier method for counting UHF stations—the so-called UHF discount—that allows a broadcaster to count only half a station’s coverage area when calculating its ownership cap for stations above channel 14. Its use would potentially allow Sinclair and Tribune to combine with fewer required spinoffs.

Pai Has The Votes

While a tally hasn’t been made public, Pai has likely secured the three votes he needs to shift the review to an administrative law judge review. Commissioner Jessica Rosenworcel, the lone Democrat on the FCC, has been a critic of the proposed buyout and she quickly announced she voted in favor of putting it before an FCC judge. Rosenworcel has repeatedly raised questions about decisions made by the FCC, including a change to the television UHF discount rule just a month before the Sinclair-Tribune rollup was announced last year. “Too many of this agency’s media policies have been custom built to support the business plans of Sinclair Broadcasting,” Rosenworcel said in a statement. “With this hearing designation order, the agency will finally take a hard look at its proposed merger with Tribune. This is overdue and favoritism like this needs to end.”

Commissioner Michael O’Rielly said he will also likely vote to put the deal into the hands of an administrative law judge – as long as the proposed order includes “sufficient and defined timelines” so the review doesn’t drag out indefinitely.

Pai’s unexpected move also drew praise from critics in Congress. Energy and Commerce Ranking Member Rep. Frank Pallone (D-NJ) and House Communications Subcommittee Ranking Member Rep. Mike Doyle (D-PA) formally requested the Government Accountability Office (GAO) to look into how Sinclair planned to use joint sales agreements and shared services agreements with the stations it was selling in order to get around ownership limits. They said they’re happy to see Pai is now echoing their concerns. “The FCC’s order could effectively block the Sinclair merger, which would be a huge win for consumers,” Pallone said.

Doyle noted it’s a rare situation where there’s bipartisan opposition ranging from the conservative NewsMax and Glenn Beck’s TheBlaze on the right to left-leaning groups like Free Press. “This is a welcome and long overdue development,” Doyle said. “As I have said many times, Sinclair’s proposed merger would hurt consumers, competition, and the vibrancy and independence of our nation’s local media.”

The curveball at the FCC came despite repeated reports dating back several months that said the Department of Justice was prepared to give its blessing to Sinclair buying Tribune. Executives said earlier they had expected the merger to close by the end of the first half.

A ‘Remarkable Shift’

Sinclair and Tribune are signaling they intend to press forward with their merger. But critics of the deal were elated. Free Press called Pai’s decision to put the review to a hearing process a “remarkable shift” by the chairman, who it accuses of removing the “public-interest safeguards” that would have prevented the merger from being approved. “Free Press hasn’t seen eye to eye with chairman Pai since he took over the FCC. But today’s announcement is unequivocally the right thing to do under the law,” policy director Matt Wood said. “This is a giant win for the public, and a huge setback for Sinclair’s mega-merger plans.”

Under the hearing process Sinclair would have an opportunity to make its case for why the merger should be approved. But as Wood noted, it is “extremely rare” for transactions to be survive the process. “That’s why analysts and investors rightly see today’s news as potentially a fatal blow for this merger.” Shares of Tribune shares plunged 17% during Monday trading on Wall Street. Sinclair’s stock price declined 12% as investors absorbed the news.

Wells Fargo Securities analyst Marci Ryvicker thinks Sinclair could now try to work with the FCC to try to get the deal approved. But in a note to clients on Monday, Ryvicker said that, based on what Pai said publicly, there is “serious risk” that the Sinclair-Tribune marriage will be called off for good.