Sinclair Defends Tribune Merger Plan and Dismisses ‘Exaggeration’ of Critics

By Ted Johnson

LOS ANGELES (Variety.com) – WASHINGTON — Sinclair Broadcast Group defended its plans to divest stations as a way to secure approval for its merger with Tribune Media, dismissing critics as resorting to “speculation, exaggeration, and outright misstatement to conjure alleged harm.”

The $3.9 billion transaction that would create an unprecedented giant in local broadcasting, as Sinclair would be the largest owner of stations with a reach of almost 59% of the country. Under the plan, Sinclair would ultimately own 215 stations in 102 markets.

Sinclair still has to shed a number of other stations to comply with media ownership rules, including one that limits broadcast holdings to no more than 39% of the country. In April, it outlined a list of 23 outlets it plans to sell, but critics said the company would continue to have influence over a number of the divested stations.

Sinclair’s divestments were extensive enough to trigger another round of public comments to the , and in a filing on Thursday, the company again argued that the transaction would be in the public interest and would not disrupt the media marketplace.

It even cited U.S. District Judge Richard Leon’s ruling in favor of AT&T in the recent antitrust trial over its merger with Time Warner to show why such a broadcast giant was needed in the midst of a quickly changing media landscape.

“As the United States District Court for the District of Columbia recently recognized, the idea that Google, Facebook, YouTube, and Netflix do not compete with traditional programmers and [multichannel programmers] ‘defies reality.’ And it further defies reality to believe that broadcasters do not compete with these same new entrants, in addition to rapidly consolidating cable and satellite providers,” Sinclair said.

Sinclair’s other points:

Divestments: Critics argued that Sinclair’s plans to divest stations to comply with the 39% media ownership cap were a “sham,” as the company would be transferring ownership to entities to which it would still have substantial ties.

For instance, Newsmax raised questions about Sinclair’s plans to sell stations to Cunningham Broadcasting as well as to an LLC set up to buy one of the biggest Tribune properties, WGN-TV in Chicago.

Cunningham Broadcasting, Newsmax noted, was until very recently owned by the estate of Carolyn Smith, the mother of Sinclair’s controlling shareholders, including her son, executive chairman David Smith, while non-voting stock is set up in trusts for the children of those shareholders. Newsmax also noted that Sinclair continues to have other ties to Cunningham, including guaranteeing almost $54 million in debt, according to its latest 10-Q filing.

Sinclair called Newsmax’s claims “erroneous and misleading,” and that the company “does not control or hold any attributable interest in Cunningham, nor do the Smith brothers own any stock, voting or non-voting, in Cunningham.” Its CEO Michael E. Anderson holds 100% of the voting shares, Sinclair said.

Newsmax also took issue with the purchase of WGN, noting that the sale would be to a newly formed company headed by Steven Fader, the CEO of Atlantic Automotive Corp., a chain of auto dealerships. David Smith holds a controlling interest in Atlantic Automotive. It also noted that Sinclair has options to buy back those stations.

Critics have also taken aim at plans by Sinclair to have joint sales and shared services agreements with WGN and another three stations that are to be sold to Howard Stirk Holdings, owned by commentator Armstrong Williams. Under those agreements, Sinclair would continue to provide advertising sales and other services to the stations, and would be able to collect a portion of the revenue.

Sinclair, through, said the options and agreements with the divested stations are “entirely consistent” with previous transactions that have won FCC approval. The company said it “will not be lending money to any buyers of the divested stations,” and that the arrangements would not trigger FCC rules governing holdings of debt and equity.

Sinclair also said it may guarantee the financing of the three station sales to Howard Stirk Holdings and to the company set up to buy WGN, but “such guarantees are consistent with law.”

Top-four combinations: Sinclair plans to own two of the top-four rated stations in Indianapolis and St. Louis, under newly relaxed FCC ownership rules that allow for such combinations on a case-by-case basis.

Some groups, like the American Cable Association, warn that such combinations will give Sinclair increased power over retransmission consent negotiations and will ultimately drive up the costs that multichannel video providers pay to carry those stations.

Sinclair argues that there is no evidence showing that this would “automatically result” in greater leverage during those carriage negotiations. It noted that “the ownership of two top-four stations in a market means the owner has more to lose if an agreement is not reached,” as those stations would go dark on cable or satellite platforms.

Sinclair said “the idea that a top-four combination in Indianapolis or St. Louis will give Sinclair leverage over these MVPDs is absurd. It also ignores the fact that Tribune already owns two top-four stations in each of these markets and has done so for years without having any unique impact on retransmission consent fees.”

It also said, even if there were an increase in those fees, it is a “giant leap” to conclude that it would be “inherently bad for consumers.” The fees, Sinclair said, are a source of funding for local news and other programming.

UHF discount: Sinclair also pushes back on the argument that the approval of their merger should be delayed until a federal appeals court rules on a key FCC ownership rule.

Station groups like Sinclair benefit from the so-called UHF discount, in which their UHF holdings are counted as just 50% of their reach. That allows a number of media companies to amass many more stations and still fall within the 39% national ownership cap. The reason for the 1980s rule was to account for the poorer UHF signal, but that disparity has disappeared with the switch to digital television.

In April, a federal appellate court heard a challenge to the FCC’s continued use of the discount, and the judges were skeptical of keeping an obsolete rule on the books. But they have yet to rule on the discount, something that would have a big impact on Sinclair’s merger plan.

Sinclair says the FCC has a “long history” of approving transactions, even while some of its relevant regulations were facing court challenges. “There is no basis for departing from that precedent here,” the company said.

Final public responses to Sinclair’s plans are due by July 12.