Sinclair Station Sales Risk New Scrutiny as Part of Tribune Deal

(Bloomberg) -- Sinclair Broadcast Group Inc.'s bid to become a broadcasting powerhouse by purchasing Tribune Media Co. hinges on spinning off TV stations to comply with U.S. limits on broadcast ownership.

Yet its proposals to sell stations from Pennsylvania to California are drawing fresh scrutiny, as critics including business rivals say some of the transactions are designed to evade the ownership rules.

In one case, two Texas stations are to be sold to a partner company that until recently was controlled by the estate of the mother of Sinclair's controlling shareholders. And the flagship Tribune station in Chicago, WGN-TV, is going to an automobile executive who's a business partner of Sinclair Chairman David D. Smith.

“They're not really arms-length. They're not really divestitures,” Chris Ruddy, chief executive officer of Newsmax Media Inc., which offers TV news that competes for viewers with Sinclair, said in an interview. “It's just really an insult to the public, to the rules, and to fairness.”

Sinclair says the station buyers are independent businesses, and that it's working diligently to follow the rules as it seeks to close the $3.9 billion Tribune deal proposed in May 2017. The Justice Department and the Federal Communications Commission are scrutinizing the transaction, with a decision possible in coming weeks. The FCC has asked for comments through July 12, and could move toward a decision soon after.

“Ownership rules are not being evaded; they are being complied with,” Sinclair said in a statement.

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At issue is whether Sinclair, which grew from a single TV station in Baltimore in 1971, can win approval for the purchase of Tribune's 42 stations, including outlets in New York and Los Angeles. The purchase would lift Sinclair's station total above 200.

The resulting growth spurt is so great that Sinclair has proposed selling stations in 18 markets in order to keep below ownership limits designed to protect the public interest by ensuring competition and diversity of voices on the airwaves.

Criticism has arrived from groups including the American Civil Liberties Union, which in an FCC filing called the proposed deal “anticompetitive to its core.” The attorneys general of Illinois, Iowa and Rhode Island told the agency that “massive consolidation proposed in these applications violates the law.”

Among other things, Sinclair's expansion would amplify the reach of voices including Boris Epshteyn, a former aide to President Donald Trump whose commentaries run on its stations. Epshteyn drew notice with a recent segment about the separation of children from parents illegally crossing the southern U.S. border in which he said, “while some of the concern is real, a lot of it is politically driven by the liberals in politics and the media.”

Once all its proposed purchases and sales are completed, Sinclair calculates it would reach almost 59 percent of the U.S. audience -- or less than 38 percent using a discount allowed under FCC rules. That snugs it up against the U.S. national cap of 39 percent.

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The discount, which lets station owners count only half the audience of some stations, is under challenge in a court case, and a ruling expected by August could leave Sinclair above the cap. Some policy groups and Democratic lawmakers have asked the FCC, led by Chairman Ajit Pai, a Trump appointee, to delay action on the Sinclair deal until the court rules.

Pai also may act independently to raise the ownership limits, even as Sinclair's deal remains under consideration. Sinclair has called for eliminating the national limit on ownership, and other broadcasters have asked for an increase to 50 percent.

For now, Sinclair's deal is to be judged against the limit of 39 percent, and to help stay under that cap it's proposed selling KDAF in Dallas and KIAH in Houston to Cunningham Broadcasting Corp. -- a partner with a shared history.

Purchase terms include generous rights for Sinclair to buy back the Texas outlets. Elsewhere, Sinclair provides programming or services to more than a dozen Cunningham stations, in Baltimore, Salt Lake City, and other locations.

“Cunningham is operated completely separately from Sinclair,” Sinclair said in the statement. “Sinclair will have no involvement in the operations of the Dallas and Houston stations being sold to Cunningham.”

Not everyone agrees. The deals “scream out contrived, bogus and sham,” Howard Weiss, an attorney for Herndon Reston Indivisible, a Washington-area viewers' group that objects to the merger, said in a filing.

Cunningham until recently was controlled by a trust held by Carolyn C. Smith, the mother of four Smith brothers, including David, who are Sinclair's controlling shareholders. She died in 2012, and the trust provided that voting shares would be distributed to her sons -- but FCC rules on owning multiple stations in the same market prohibited the Smith brothers from also owning Cunningham.

The solution, which Cunningham proposed in 2013: a shift of voting control to Michael Anderson, Cunningham's president, who joined the company in 2009. The transfer was designed to take place no later than 10 minutes after shares went to the brothers: David Smith, the chairman, along with J. Duncan Smith, Robert E. Smith and Frederick G. Smith.

“The Smith brothers will never actually exercise control over the shares for any appreciable time” but will act “as an intermediary and instantaneous pass through,” according to a Cunningham FCC filing ahead of the transfer. Closing for the deal was set for Sinclair's headquarters about 14 miles (22 kilometers) north of Baltimore, according to the filing. Cunningham's headquarters is in Baltimore, according to the company's website. The FCC approved the change in December.

All of Cunningham's non-voting stock is owned by trusts for the benefit of the Smith brothers' children, Sinclair said in a May filing.

The shift made “ownership more complex but Cunningham is only superficially not under Sinclair's control,” Newsmax said in a filing.

The Texas stations matter because the Dallas and Houston markets combined comprise more than 4.5 percent of the national audience, according to Nielsen estimates. The stations get the discounted treatment, but even so if their audiences were attributed to Sinclair, the deal would bust the 39 percent cap.

NCTA-the Internet and Television Association, a trade group with members including largest cable provider Comcast Corp., questioned whether Sinclair would retain de facto control of the stations given “the extensive and well-established connections between Sinclair and the buyers.”

Cunningham didn't respond to emailed queries and telephone messages.

The WGN-TV sale would include an option for Sinclair to buy it back after eight years -- renewable five times, to cover a total of 48 years. The buyback periods for both Texas stations are also renewable for as long as 48 years.

Such terms are “the very definition of a sham parking arrangement, designed to allow Sinclair to divest in name only, with the opportunity to buy back at a bargain basement price when the commission inevitably continues to liberalize its ownership rules,” Weiss, the attorney, said in a filing.

“The existence of an option does not indicate that the current ownership is temporary,” Sinclair said in its statement. “It simply provides Sinclair with flexibility in the event the ownership rules are changed to allow ownership of the Cunningham stations.”

To contact the reporter on this story: Todd Shields in Washington at tshields3@bloomberg.net

To contact the editors responsible for this story: Jon Morgan at jmorgan97@bloomberg.net, Elizabeth Wasserman, Ros Krasny

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