Jessell: Tribune Starts Over, Sinclair Digs Out
I ended last week’s column on the Sinclair-Tribune merger debacle with a simple question: What’s Next?
Well, “next” happened on Wednesday when Tribune pulled out and sued Sinclair for $1 billion for jerking around the Justice Department and the FCC so much that they refused to approve the deal.
Tribune’s withdrawal at its first contractual opportunity was no surprise. At things now stand, no deal involving Sinclair is possible. Having been accused of “lack of candor” by the FCC, Sinclair can’t buy a low-power station in Death Valley right now, let alone a major TV station group.
But the lawsuit was — at least to me — a surprise. Through the long 15-month regulatory struggle, I had assumed that Tribune was meekly going along with Sinclair’s determination to keep each and every one of the Tribune stations within its control, antitrust guidelines and FCC ownership limits be damned.
But Tribune’s 62-page complaint against Sinclair maintains that it was often at odds with Sinclair’s aggressive approach. All it wanted to do was get the deal done. Unlike Sinclair, it didn’t want to risk the whole deal for the sake of a dozen or so stations.
According to the complaint, Tribune even threatened to sue Sinclair if it didn’t stop badgering the regulators.
So where does all this leave Tribune? Pretty much where it was before it struck its deal with Sinclair in May 2017 — on the block. As CEO Peter Kern pointed out on a call with analysts on Wednesday, “the regulatory environment remains welcoming and open to sensible consolidation.” The problems that Sinclair created are Sinclair’s problems alone.
Kern hinted on the call that Tribune may sit tight and might even buy some stations. But I don’t believe it. I’m betting it will simply resume its pre-Sinclair exit strategy and it will find no lack of buyers.
Recall that just prior to the announcement of the Sinclair deal, Fox tried to swoop in and buy Tribune out from underneath Sinclair. It coveted some of Tribune’s stations and it feared Sinclair becoming too big an affiliate group for it to push around.
Fox no longer has anything to fear from Sinclair, but its interest in Tribune’s larger Fox affiliates is probably greater than ever. The Murdochs are restructuring Fox into a broadcasting-first company built on sports and news.
Fox strongarmed Sinclair into spinning off seven of the Tribune Fox affiliates. Now Fox can buy those directly from Tribune, and it may be interested in more of Tribune’s Fox affils.
How many more would depend on what happens with the FCC national ownership cap. Right now, with the UHF discount restored, Fox could grow until it reaches around 66% of TV homes if it buys all UHF stations.
However, if the FCC resets the cap at 50% this fall as I think it will (and the court blesses it), Fox would be maxed out with only a handful more than it agreed to buy out of the merger.
One approach for Fox is the one it proposed pre-Sinclair: Buy all of Tribune (perhaps with a partner) and spin off the stations it doesn’t want or that it must relinquish to comply with the ownership cap, wherever it ends up.
As Tribune scans the station trading marketplace, it should still find Soo Kim an interested buyer. Kim’s newly created Standard Media agreed to buy nine stations in seven markets that Sinclair finally agreed to spin off to appease Justice.
That small cluster of mostly Fox affiliates was to be the foundation of a much larger group. Kim told me last May he has access to plenty of capital, so he could go after more of the Tribune stations or better ones.
Nexstar is always a factor, too. On its call with analysts this week, CFO Tom Carter said that his company has been aggressively delevering, and suggested that it had capacity to buy should the right deal come along.
In fact, if Tribune invites bids, it should get them from all corners of the broadcasting industry. The group is an odd mix of major market CWs, weak mid-market Fox affiliates and strong mid-market Big Three affiliates. There is something for everyone.
One caveat: Times have changed since Tribune first put out the for-sale sign two years ago. Unlike then, Kim, Nexstar and other potential buyers now have other places to spend their acquisition bucks. Cox is looking for a buyer or partner for its 14 stations; Gray is spinning off nine stations from its Raycom merger to avoid regulatory entangements; and Cordillera wants to exit broadcasting by selling its 11 small-market stations.
So, enough about Tribune. What about Sinclair?
Not in the entire history of broadcasting, with the possible of RKO, has a major company so thoroughly managed to trap itself in such a regulatory and legal morass.
If Executive Chairman David Smith did not control the board, he would be thrown out for directing this debacle and hobbling the company at a critical time for it and the industry. It will be interesting to see who is made the scapegoat.
Sinclair can continue to churn out cash, but, from a strategic standpoint in broadcasting, is indefinitely sidelined. Until it resolves the alleged character issues at the FCC, it cannot buy a broadcast license. It can’t even renew one. That’s a hard place for a company that, along with Nexstar and Gray, has led the consolidation of the broadcast industry for the past two decades.
It was pathetic listening to CEO Chris Ripley on the second-quarter call with analysts Tuesday talking about how the regulatory environment is still conducive to deal-making as if Sinclair were still a player.
Sinclair’s challenge today is to start digging out — and it’s going to be costly.
First it must settle with Tribune. In its suit, Tribune is asking for at least $1 billion and, from reading the complaint, it seems like it has a sound, well-documented case.
Pick a number. $100 million, 10 cents on a dollar, to make Tribune go away. Sounds good to me.
And then it has to return to the good graces of the FCC. It could opt to go through the hearing the FCC commissioners ordered to determine whether it is still fit to be a licensee, but that is a long and costly course — and a risky one. It could lose.
Better for Sinclair to throw itself on the mercy of FCC Chairman Ajit Pai and agree to a settlement. Sinclair pays, say, $50 million, submits to a compliance program and vows not to mislead the FCC even again.
That should clean up the entire mess, unless, as has been suggested to me by a couple of people, the Sinclair independent shareholders file a lawsuit against Smith and his team for gross mismanagement. I don’t know who would end up paying for that litigation and eventual settlement.
Needless to say, it’s going to be a long road back for Sinclair.
I received an email from a communications attorney that said the Tribune complaint “reads like a how-to instruction manual for shooting one’s foot off in dealing with government agencies.”
Indeed, Sinclair did everything wrong, allowing arrogance and self-righteousness to overcome its good sense at every turn. If Tribune is to be believed, Sinclair wasn’t listening to anybody.
According to the complaint, at a Jan. 25 meeting, Makan Delrahim, the assistant attorney general heading the antitrust division, told Sinclair General Counsel Barry Faber (as others had before) that Sinclair had to spin off Big Four affiliates in 10 overlap markets if it wanted Justice’s blessing. Instead of acquiescing to the demand, Faber lectured Delrahim about the television advertising marketplace and challenged him to “sue me.”
It was dumb thing to do. But Faber had the right idea. Some broadcaster needs to lure Justice into court and make Delrahim and his media minions explain why the department’s perception of broadcasting has not changed since the 1970s. It still refuses to acknowledged that cable competes with broadcasters for local ads. It’s absurd.
But you don’t insult the head of the antitrust department and you don’t try to trigger prolonged litigation when you have a $3.9 billion merger hanging in the balance. You do it when the stakes are vastly lower, when you have engineered a test case with all the facts clearly in your favor.
Sinclair had big plans for itself after it closed on Tribune and stretched its reach to 66% of the country with thriving news-producing stations in the three largest markets.
It would have used the platform to launch some kind of conservative news alternative to Fox News. The last thing the nation needs is another highly partisan news operation. So, if the collapse of the merger means the death of Smith’s national news ambitions, I am happy for it.
But, as I said a couple of weeks ago, I fear that the loss of the expansive Sinclair-Tribune platform, the costs of settlement and its license impairments may slow Sinclair’s efforts to develop badly needed new businesses based on ATSC 3.0.
That would be tragic. Sinclair has poured tens of millions of dollars into the effort, many times more than any of its peers. If Sinclair is forced to pull back on 3.0, I don’t see anybody else picking up the slack.