August 2, 2018

Principle over Politics

In a surprise, yet principled decision, FCC Chairman Ajit Pai and his 3 fellow FCC commissioners voted 4-0 to send the proposed Sinclair-Tribune merger to an administrative judge, ostensibly killing any chance of the merger being approved. The decision by Pai was especially courageous because President Donald Trump, the man who put Mr. Pai into his chairmanship, tweeted his displeasure over the decision the night before Pai was scheduled to appear in front of a Congressional oversight hearing. The tweet added extra weight to an already controversial and politically charged process that has unfolded over the past 14 months, ending in a surprise rejection of the proposed merger.

When the merger was first announced in May of 2017, almost every analyst (including this analyst) believed that the approval for the merger was a foregone conclusion. So, what happened to change the minds of the FCC?

In May of 2017, the far-right Sinclair Broadcast Group reached an agreement to acquire 42 broadcast stations and other media assets from Tribune Media for $3.9 billion cash and stock. If approved by the FCC, the combined media entity would reach 72% of US households, a figure far beyond the 39% allowed by Congress.

However, to be compliant with the ‘39% Congressional rule’, FCC Chairman Ajit Pai, reinstated the antiquated UHF discount rule enabling Sinclair to count only half of its UHF audience based on the premise that UHF has a weaker signal than the VHF band. The decision was panned by both Republicans and Democrats, and several public interest groups banded together to challenge the FCC decision in court.

In April of 2018, a 3-judge panel on the DC Court of Appeals heard the case and in questioning, raised concerns as to the logic of reinstating a rule that the FCC itself considered obsolete. The Court also raised concerns about the standing of the groups who brought the case to the court in the first place.

On July 25th, 2018, the DC Court dismissed the case claiming the plaintiffs lacked standing and did not consider the merits of the case.

With Every Decision Going its Way, why did the FCC Kill the Sinclair-Tribune Merger?
Even with the UHF discount, Sinclair Broadcasting needed to sell some of its television stations to be compliant with FCC ownership rules. In February 2018, Sinclair unveiled a plan to sell 2 stations, WPIX New York and WGN Chicago which would have made Sinclair in compliance with the FCC rules. However, Sinclair chose buyers that had close ties to company executives and would allow Sinclair to continue to operate the stations, while at the same time paying a below-market price for these valuable assets. In the case of WGN, there was also a buy-back option for the station.  This move raised suspicions from both the FCC and DOJ that Sinclair was trying to evade Federal ownership rules.

Feeling the heat from the Feds, Sinclair revised its plans and chose to sell 23 stations including WGN Chicago. WGN was to be sold at a below-market rate, to a new entity run by businessman Steven Fader. Mr. Fader’s expertise is in the auto industry where Sinclair’s Chairman David Smith happens to be a board member for Fader’s company, Atlantic Automotive Group. Sinclair also planned to sell KDAF Dallas and KIAH Houston to Cunningham Broadcasting. Cunningham also has close ties to Sinclair and Chairman David Smith.  It should be noted that Sinclair currently manages 14 stations for Cunningham, but the magnitude of this deal has brought further scrutiny to the cozy relationship between Sinclair and Cunningham.

A Principled Decision
Below is Chairman Pai’s decision and explanation as to why the decision was made.

“Based on a thorough review of the record, I have serious concerns about the Sinclair/Tribune transaction. 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.  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 these disputes issues. For these reasons, I have shared with my colleagues a draft order that would designate issues involving certain proposed divestitures for a hearing in front of an administrative law judge.”

Snatching Defeat from the Jaws of Victory
Sinclair had everything going for it before they decided to skirt the rules and sell key stations to their friends at below market rates, while continuing to control the operations of these stations.  When the FCC pointed this out, Sinclair doubled down and did the same thing under the belief that the FCC would work closely with Sinclair to ensure the deal went through. They were wrong. The brash moves by Sinclair were too much even for a FCC who, by all reasonable analysis, were rooting for this deal to happen. As a result, the Sinclair-Tribune saga is all but dead.

A Note about Chairman Pai
While Chairman Pai should be applauded for sticking to principal, it should be noted that his questionable decision related to the UHF discount created this situation in the first place.  In front of the Congressional oversight committee this July, Mr. Pai was quoted as saying, “As long as I have the privilege of serving as the chairman of the FCC, I’m going to find the facts, I’m going to follow the law and I’m going to call them like I see them.“  I believe most Americans would like to see Mr. Pai continue to follow through on this pledge.

The Sinclair-Tribune merger may be dead, but its legacy will live on. On July 26th, the United States Department of Justice announced an investigation as to whether TV Station Owners violated antitrust laws by artificially inflating local advertising rates. According to the Wall Street Journal who broke the story, the Government stumbled across this practice during their review of the Sinclair-Tribune merger.

A 20-year veteran media executive, Rob Silvershein’s success in today’s competitive media environment is a direct result of his unique experiences spanning traditional, emerging, and startup media platforms. He is an accomplished strategist and spends most of his time advising media companies on how to structure themselves for long term success. He currently lives in Manhattan Beach, CA.

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