Sinclair’s problems mount after merger collapses

Sinclair Broadcast Group’s failed efforts to merge with Tribune Media and build a conservative media powerhouse may be just the start of the broadcasting giant’s problems.

Tribune called the deal off on Thursday and filed a lawsuit against Sinclair for $1 billion. The suit alleges that its would-be business partner broke the terms of their merger agreement and jeopardized the deal by arrogantly dismissing the concerns of officials at the Federal Communications Commission (FCC) and the Department of Justice.

The merger’s collapse was a stunning reversal of fortune for conservative broadcaster Sinclair. The conventional wisdom a few months ago was that Sinclair’s proposal would be approved, giving the company the ability to reach nearly three quarters of the country’s television audience. Now, Sinclair is facing questions about whether it’s even fit to hold a broadcasting license.

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Last month, the FCC accused Sinclair of misleading the agency about proposals related to the deal and voted to send the merger to an administrative law judge, a move that ultimately caused Tribune to back away.

“That is the absolute worst thing you can do as far as the FCC is concerned,” said Gigi Sohn, a former Democratic adviser at the agency.

According to the agency order last month and Tribune’s lawsuit, Sinclair overplayed its hand with a friendly FCC and a Justice Department that was fully willing to approve the merger but only if the company agreed to sell off certain stations.

Sinclair though wasn’t willing to budge and repeatedly antagonized antitrust officials at the DOJ. At one point, according to Tribune, Sinclair general counsel Barry Faber told the government “sue me” and the company even went so far as to threaten a lawsuit against the Justice Department.

“In exercising its authority under the merger agreement to lead the regulatory approval process, Sinclair repeatedly favored its own financial interests over its contractual obligations by rejecting clear paths to regulatory approval,” Tribune said in its lawsuit. “Instead, Sinclair fought, threatened, insulted, and misled regulators in a misguided and ultimately unsuccessful attempt to retain control over stations that it was obligated to sell.”

And at the FCC, Sinclair doomed its chances of getting approval by proposing a series of questionable side deals to sell off local television stations to comply with media ownership limits.

One of those involved selling WGN TV, a valuable Chicago station, to Maryland businessman Steven Fader for a price below market value. And under the terms of the deal, Sinclair would retain control of much of the stations’ operations and programming.

Compounding the FCC’s concern was the fact that Sinclair executive chairman David Smith owns a controlling stake in the car dealership where Fader serves as CEO.

“Specifically, we question the legitimacy of the proposed sale of 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 FCC said in its order.

The FCC suggested Sinclair had “engaged in misrepresentation and/or lack of candor” in its presentation to the agency, in part because it did not disclose the relationship between Smith and Fader.

Sinclair has long stoked controversy, including by requiring local news stations to air “must-run” segments with a conservative slant.

Critics have pounced on Sinclair’s missteps.

“Only now that it falls apart do we see the damage Sinclair was doing to its own ambitions with its approach,” said Craig Aaron, the CEO of the public interest group Free Press. “Now they’re not just politically toxic they’re increasingly toxic to companies that would likely do business with them.”

The merger’s demise was a victory for the strange alliance that had formed in opposition to the deal, including consumer advocates, cable companies, right-wing media outlets and Democratic lawmakers. Many of them are now openly asking if the FCC should crack down further on the broadcaster by targeting its TV licenses.

“The FCC doesn’t raise these questions of being misled or lied to lightly,” Aaron said. “Those are really serious accusations.”

It’s extremely rare for the agency to revoke or deny broadcasting licenses but the fact that that course of action is now being pushed shows how much the odds have turned against Sinclair.

“Theoretically, you could say they not only aren’t qualified to buy new licenses, they’re not qualified to own licenses,” said Blair Levin, a former FCC chief of staff and an analyst at New Street Research. “I don’t think the FCC will go that far, but that’s in play. It’s on the table.”

Even if its licenses are safe from the FCC for the time being, there is also a reported Justice Department investigation into whether it colluded with Tribune to raise advertising rates.

And Sinclair still has to contend with the possibility of $1 billion in damages from the Tribune lawsuit.

But beyond the lawsuit, some say the fallout from the failed merger will make it hard for Sinclair to find other business partners. That could put the company’s hopes of expanding on ice and leave it on the sidelines during a critical time for the media industry.

Levin said it remains to be seen how potential business partners will view the allegations presented by the FCC and Tribune.

“There’s going to be a wave of [media] consolidation and it’s not clear to me that Sinclair will be able to participate,” he said.