At 11:15am Eastern, Sinclair Broadcast Group and Tribune Media Co. each saw their shares plunge in value, setting up a tumultuous day on Wall Street.
What happened? FCC Chairman Ajit Pai shared his feelings with the world about the marriage of Sinclair and Tribune. He has “serious concerns.”
In a statement, Pai revealed that he has circulated a draft hearing designation order regarding the planned merger of Sinclair and Tribune.
“Based on a thorough review of the record, I have serious concerns about the Sinclair/Tribune transaction,” Pai said.
Those words sent shockwaves across the media landscape, as it has been the Department of Justice — and not the FCC — that has been viewed as a potential landmine that blows up the $3.9 billion deal.
What’s most troubling to Pai and his fellow Commissioners is Sinclair’s divestiture plan.
“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,” Pai said. “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.”
For these reasons, Pai has shared with his colleagues a draft order that would “designate issues involving certain proposed divestitures” for a hearing in front of an administrative law judge.
With the announcement, investors went into a mild panic on Wall Street. As of 11:45am Eastern, Tribune shares were off 15.4%, to $32.63. Meanwhile, Sinclair stock was down 5.7%, to $31.05.
Meanwhile, Democratic Commissioner Jessica Rosenworcel went to Twitter to express her pleasure that “there are now two votes at the FCC to halt [Sinclair]’s transaction with Tribune.” She said, “For too long FCC media policy has been custom built to serve the needs of Sinclair Broadcasting. This favoritism needs to come to an end. Today it does.”
In an official statement of her own, Rosenworcel added, “With this hearing designation order, the agency will finally take a hard look at its proposed merger with Tribune. This is overdue.”
As has been extensively reported by RBR+TVBR, the divestiture of up to 23 broadcast television properties by Sinclair was to resolve any issues regarding the company’s adherence to local ownership rules. The stations in February were designated for placement in the Sinclair Divestiture Trust; the trustee is RAFAMEDIA LLC, led by veteran media broker Richard A. Foreman.
Since then, some significant reworkings have been filed with the Commission. In late May, RBR+TVBR became the first news organization to learn that a planned $65 million sale of KPLR-11 in St. Louis to Meredith Corp. had been scuttled.
Asked for comment, Meredith Corp. Chief Communications Officer Art Slusark told RBR+TVBR in May, “When we signed the agreement for KPLR, we expected FCC and DOJ approvals would be obtained in the ordinary course. Recently, the DOJ expressed a preference for a buyer that does not already own a station in the market. Meredith owns [CBS affiliate] KMOV-4 in St. Louis. We do not agree with this position and are trying to resolve the matter with the DOJ.”
Meanwhile, there are some who may be questioning the parties that are to become the licensees of some key properties. WGN-9 in Chicago will be sold outright by Tribune. So will WPIX-11 in New York.
WGN is being transferred from “WGN Continental Broadcasting Co.” to “WGN TV Licensee LLC.” The “buyer,” if you will, is an entity that is led by Steven B. Fader. Fader is the Chairman and a Co-Founder of Atlantic Capital Group and has been a private equity and real estate investor for more than 15 years.
Acquiring a TV station may seem out of the ordinary for ACG. However, Fader in 1997 was President/CEO of Summa Holdings Ltd., and in January of that year decided to have his Heritage Automotive Group purchase a pair of Saturn dealerships in the Baltimore area, and the rights to a third in Annapolis.
To help finance future expansion, leading to the creation of ACG, a new partner was brought on at Summa. That individual was David D. Smith, then-President/CEO of Sinclair and now Executive Chairman, after stepping aside from day-to-day duties in January 2017.
Per the Form 314 filing, Fader would obtain the license of WGN-9 once the Sinclair/Tribune Media deal closes. A Joint Service Agreement and a Shared Services Agreement were drafted and filed with the Commission. These accompany a 50-page Asset Purchase Agreement outlining the sale of WGN-9. Money is exchanging hands: Fader’s group is acquiring WGN-9 for $60 million.
In New York WPIX-11 is being transferred from “WPIX LLC” to the similarly named licensee “New York (WPIX-TV) Licensee Inc.” for $15 million.
This entity is wholly controlled by Cunningham Broadcasting Corp., and its officer and director, Michael Anderson. Cunningham describes itself as “an independent television broadcast company” that, together with its subsidiaries, owns and/or operates 20 television stations in 18 DMAs across the U.S.
Of these stations, 16 are operated “through various management agreements with Sinclair Broadcast Group,” illustrating that Cunningham — and not Sinclair — maintains control.
Cunningham’s close ties to Sinclair may have piqued Pai’s interest. In Charleston, S.C., WTAT-24 is operated via a Lease Management Agreement by Sinclair. In Johnstown, Pa., the situation is slightly more complex. There, Cunningham operates WWCP-8 and WATM-23, the Fox and ABC affiliates. It controls WWCP through a Time Brokerage Agreement with owner Horseshoe Curve Communications and WATM through a LMA with owner Palm Broadcasting. However, Cunningham “operates” both WWCP and WATM via a master service agreement with Sinclair — owner of Johnstown’s NBC affiliated WJAC-6.
Then, there’s the language in the WPIX-11 and WGN-9 deals that effectively sets up Sinclair’s eventual ownership of the stations — once, assumingly, the FCC loosens up its ownership restrictions.
The WGN-9 and WPIX-11 deals each include an “Option Agreement.”
What does this mean? Sinclair will make a $10,000 payment to Fader’s group, and a $10,000 payment to Cunningham, for the exclusive right to acquire the assets or obtain all of the issued and outstanding equity of each “Grantor” (Fader’s group and Cunningham, respectively).
This effectively gives Sinclair the right to purchase WGN-9 and WPIX-11 from WGN TV Licensee LLC and New York (WPIX-TV) Licensee Inc., respectively, “at any time prior to the expiration of this option.”
The option expires in 2026, but the parties have agreed to five additional eight-year terms. Thus, Sinclair has 48 years to exercise its right to purchase WPIX-11 and WGN-9.
Now, all of this could be torn apart by an ALJ, with Chief Administrative Law Judge Richard Sippel thrust into the spotlight.
The FCC’s Office of Administrative Law Judges is responsible for conducting the hearings ordered by the Commission. The hearing function includes acting on interlocutory requests filed in the proceedings such as petitions to intervene, petitions to enlarge issues, and contested discovery requests.
An Administrative Law Judge, appointed under the APA, presides at the hearing during which documents and sworn testimony are received in evidence, and witnesses are cross-examined.
At the conclusion of the evidentiary phase of a proceeding, the Presiding Administrative Law Judge writes and issues an Initial Decision which may be appealed to the Commission.
With two “no” votes, this puts GOP Commissioners Michael O’Rielly and Brendan Carr on the hot seat. As of today, the FCC is a four-vote body, and a fifth Commissioner isn’t expected to join the agency anytime soon. This would be Geoffrey Starks, who would like vote alongside Chairman Pai and Commissioner Rosenworcel.
Thus, the pressure is on for O’Rielly and Carr — and perhaps a few executives housed in a nondescript office park in the Baltimore suburb of Hunt Valley, Md.
At the American Cable Association, applause came within an hour of Pai’s statement.
“The American Cable Association applauds FCC Chairman Pai for seeking the support of the other Commissioners to refer the Sinclair-Tribune transaction and the associated station sales to Fox and others to an Administration Law Judge, an action that’s understood to signal the Commission’s disapproval of the deal,” said ACA President/CEO Matthew M. Polka. “From the beginning, ACA has insisted that the transaction is unlawful and certain to create numerous consumer harms, such as higher retransmission consent fees. It’s well past time for Sinclair to realize that its effort to engage in massive media consolidation has failed and that it should withdraw the transaction without delay so the FCC no longer needs to devote any of its limited resources to a doomed endeavor.”