Tribune files $1B suit against Sinclair as deal scrapped

Updated at 10:18 a.m.

TRIBUNE MEDIA has withdrawn from a planned merger with Broadcast Group following scrutiny from federal regulators. / BLOOMBERG NEWS FILE PHOTO/JONATHAN HANSON

NEW YORK -Sinclair Broadcast Group Inc.’s bid to become a nationwide powerhouse collapsed as Tribune Media Co. withdrew from a planned merger that drew the ire of federal regulators and filed a $1 billion lawsuit.

Tribune announced its withdrawal from the $3.9 billion transaction in a emailed statement Thursday, three weeks after regulators questioned Sinclair’s honesty. Tribune said it has filed a lawsuit in the Delaware Chancery Court against Sinclair seeking the damages for losses incurred as a result of “Sinclair’s material breaches” of the merger agreement.

The Federal Communications Commission on July 18 sent the deal to a hearing by the agency’s administrative law judge, citing possible misrepresentations or lack of candor in some proposed station divestitures. Hearings can take months, and the prospect of enduring one has killed previous deals.

“This uncertainty and delay would be detrimental to our company and our shareholders,” Tribune CEO Peter Kern said in the statement.

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Sinclair tumbled as much as 5.4 percent to $25.65, while Tribune rose as much as 3 percent to $34.65.

The FCC order asked whether Sinclair was in fact the hidden buyer in a proposal to sell Chicago’s WGN-TV to a Maryland automobile executive with no prior broadcast experience and ties to Sinclair management. The agency also questioned links between the Maryland-based broadcaster and a buyer proposed for stations in Dallas and Houston. Tina Pelkey, an FCC spokeswoman, declined to comment.

The FCC asked the judge to decide whether “Sinclair engaged in misrepresentation and/or lack of candor in its applications” and asked whether Sinclair had “attempted to skirt the commission’s broadcast ownership rules.”

Sinclair proposed the deal in May 2017, testing federal ownership limits with the plan to purchase 42 stations, including outlets in New York, Chicago and Los Angeles. The transaction would have left Sinclair with more than 200 stations. It’s already the largest U.S. broadcaster by number of stations, with 192. The setback likely won’t mark the end of Sinclair’s consolidation ambitions, said Paul Sweeney, an analyst at Bloomberg Intelligence.

“While walking away from its merger with Sinclair prevents Tribune from languishing in regulatory purgatory, it’s unlikely to diminish Sinclair’s appetite for future M&A,” he said.

Sinclair executives said on the company’s earnings call Wednesday that they’re still looking to buy more broadcast stations or regional sports networks regardless of the outcome with Tribune. They also are reportedly launching a streaming news service that is seen as a competitor to Fox News.

The politically conservative broadcaster is seen as friendly to President Donald Trump. He has praised the company on Twitter, saying it’s superior to AT&T Inc.’s CNN and Comcast Corp.’s NBC. Its on-air voices include Boris Epshteyn, a former Trump aide.

Ownership limits

By absorbing Tribune, Sinclair would have grown large enough to exceed federal ownership limits. It offered divestitures in order to comply. It is those transactions that drew the ire of the FCC and its Republican chairman, Ajit Pai. Even after the proposed sales, the company would “control those stations in practice, even if not in name, in violation of the law,” Pai said a July 16 statement.

Sinclair had planned to sell seven Tribune stations to 21st Century Fox Inc.

Pai has loosened media ownership rules since being appointed by Trump last year, and Democrats have said the chairman sought to benefit Sinclair — an assertion rejected by Pai. Whether Pai sought to help Sinclair is said to be subject of a probe by the FCC’s inspector general.

Tribune also reported second-quarter adjusted earnings per share of 99 cents, beating the highest analyst estimate, and consolidated operating revenue of $489.4 million, topping the average estimate of $482.3 million.

Todd Shields is a reporter for Bloomberg News.