Sinclair/Tribune Breakup Expected, but That May Not Stop ALJ Process, Say Observers

FCC designation for hearing of Sinclair’s proposed buy of Tribune will almost certainly kill that deal by early August and could threaten other Sinclair licenses even if the deal goes away, said industry officials in interviews. Though Sinclair withdrew the divestitures in Dallas, Houston and Chicago (see 1807180060) targeted by the hearing designation order, "material questions remain,” said the HDO, released Thursday as expected (see 1807180066). The case “includes a potential element of misrepresentation or lack of candor that may suggest granting other, related applications by the same party would not be in the public interest,” it said.

Many broadcast industry officials said Sinclair could withdraw the deal. If not, they said that Tribune will likely seek to end it rather than wait for an administrative law judge process that's historically lengthy and may be especially contentious, given the severity of the accusations against Sinclair. Thursday, stock in both companies closed down about 4 percent.

Tribune said it's evaluating the HDO and “assessing options.” Tribune will be “greatly disappointed if the transaction cannot be completed, but will rededicate our efforts to running our businesses and optimizing assets,” it said. Though the contracts between Sinclair and Tribune contain clauses that would punish Tribune for pulling out early, those clauses don’t apply if Tribune waits until Aug. 8, the deal’s walkaway deadline or “outside date,” said broadcast attorneys and analysts. Sinclair and the FCC didn’t comment.

Built into the process of ALJ hearings are motions allowing such proceedings to be broadly expanded into other issues, and room for numerous appeals, said Garvey Schubert broadcast lawyer Erwin Krasnow. Deals are generally withdrawn rather than go through that process because the parties can’t have certainty about when the litigation will end, he said. “I believe it will break up,” said Brian Thorn, strategic research associate at the National Association of Broadcast Employees and Technicians. “For too long the @FCC has twisted & bent its policies to serve the business plans of Sinclair,” tweeted Commissioner Jessica Rosenworcel.

Commissioner Mike O’Rielly noted the ALJ process generally kills a deal, in a statement criticizing the procedure released with the order. At his urging, the order contains a requirement that the ALJ announce an end date for the hearing process after it begins. The ALJ is required to issue a scheduling order with a set date for resolution within 15 days of when written appearances from the parties are due, the HDO said. That rule will apply to future ALJ proceedings as well, O’Rielly said. “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.”

Sidecar Misrepresentations?

The HDO spotlights planned divestitures to frequent Sinclair sidecar company Cunningham Broadcasting and to WGN-TV. The latter is a company created to receive the divesture of WGN-TV Chicago and run by Steven Fader, CEO of a company that Sinclair controlling shareholder David Smith has a controlling interest in and that is a tenant and advertiser of Sinclair.

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 order said.

If the ALJ or FCC find Cunningham’s relationship with Sinclair was misrepresented, it could affect the numerous other licenses Sinclair operates on Cunningham’s behalf through sharing agreements that aren’t involved in Sinclair/Tribune, many lawyers said. When those stations are involved in future applications or license renewals, Cunningham and Sinclair’s relationship could be challenged in each case, attorneys said. The matter could also lead to challenges of Sinclair’s fitness to hold any FCC license and spread to other Sinclair sidecars such as Howard Stirk, attorneys said.

“If the judge in fact finds that Sinclair attempted to deceive the FCC, it could be grounds for the Commission to revoke all of Sinclair’s licenses, not just the ones pertaining to this merger,” said Free Press Senior Counsel Jessica Gonzalez. “Under the law, lack of candor suggests Sinclair is unfit to hold any broadcast licenses.”

Public Knowledge Senior Vice President Harold Feld said concerns about the HDO infecting other Sinclair licenses are premature. Since the order gives Sinclair 20 days to file a petition to dismiss without prejudice, it could do so and the HDO and its findings would go away, he noted. "Sinclair dismisses without prejudice, there is no further action, no lack of candor finding, and no cause for the FCC to pull the licenses," Feld tweeted. The HDO stops short of finding a lack of candor, instead finding that there's a question of material fact, he said. "Oh man, Sinclair really shit the bed but good at the FCC," Feld tweeted, linking to the HDO.

'Crown Jewels'

The deal for WGN includes letting Sinclair own most of the stations’ nonbroadcast assets, while Fader would own the station’s transmitter.

“We question the legitimacy of the proposed sale of a such a highly rated and profitable station in the nation’s third-largest market to an individual with no broadcast experience, with close business ties to Smith, and with plans to own only the license and minimal station assets,” the HDO said. "One could argue that Sinclair’s proposal to divest what has been described as one of the 'crown jewels' of Tribune makes no sense from a business perspective unless that divestiture permitted Sinclair to maintain effective control over the station."

The order outlines the long history of Sinclair’s relationship with Cunningham, the FCC’s past finding of an inappropriate relationship with Sinclair when Cunningham was named Glencairn, and the company’s longtime ownership by the estate of David Smith’s mother. “The close relationship between Sinclair and Cunningham could explain how Cunningham was able to execute an agreement to purchase stations KDAF and KIAH at what appear to be below-market prices,” the HDO said of the Dallas and Houston divestitures.

Though possible the FCC could halt the ALJ process if the deal is withdrawn or resolve it through a consent decree, broadcast industry officials don’t believe either course is likely. If the agency were seeking to negotiate the deal or cut short the ALJ process, it’s unlikely such a damning HDO would have been issued, many said. Sinclair’s last-minute attempt to amend the deal amid HDO circulation was seen in the agency as a far-too-late response to months of FCC urging for cleaner divestitures, industry officials said. The agency expected Sinclair to withdraw the deal with the HDO’s circulation, which could have prevented the item from being released, industry officials said.

“As a result and in light of the ongoing and constructive dialogue we had with the FCC during the past year, we were shocked that concerns are now being raised,” Sinclair said Wednesday, announcing its changed plan.