Those of us who make our livings from mining court papers know that divorce filings, replete as they are with the settling of scores and accusations of putrid behavior, can be pure gold.
But it’s rare to find a divorce document as revealing as the $1-billion lawsuit filed Thursday by Tribune Media against its former corporate fiance, Sinclair Broadcast Group. The lawsuit, which landed as Tribune terminated the $3.9-billion merger deal the two companies announced in May 2017, portrays Sinclair as absolutely the merger partner from hell. The lawsuit suggests that if Sinclair had entered the deal fully intending in advance to blow it to smithereens and end up with nothing but a $1-billion claim, it could not have handled things better.
Tribune is what remains of the Chicago media company that once was the parent of this newspaper. (The Times was spun off from Tribune in 2014 and is now privately-owned.) Sinclair is a Maryland-based broadcast chain known for its truculently right-wing editorial policy. Already the largest owner of local television stations in the country, Sinclair would have become even bigger after the merger, a broadcast behemoth with 200 stations.
According to Tribune’s lawsuit, however, Sinclair wasn’t smart enough to understand that it’s one thing to be outspoken in your news presentations, but when you’re dealing with government regulators who have the power to quash your deal, the right approach is to be truckling, not truculent. That is, be nice. Instead, Tribune says, Sinclair misled and insulted government regulators.
Sinclair released a statement asserting that it had not misled the Federal Communications Commission or acted “in any way other than with complete candor and transparency.” The lawsuit, it said, “is entirely without merit.”
The Sinclair-Tribune merger was subject to approval from the FCC and the Department of Justice. By all that is holy, it should have been a slam-dunk. Under its President Trump-appointed chairman, Ajit Pai, the FCC had signaled a hands-off policy on a raft of regulatory principles.
From the DOJ’s standpoint, the deal had all the hallmarks of a merger Trump would find especially gratifying. Indeed, once it started to unravel, Trump tweeted regretfully that it “would have been a great and much needed Conservative voice for and of the People.”
Yet Sinclair marched into the regulatory review with all guns blazing. Its executives “fought, threatened, insulted, and misled regulators,” belittling DOJ antitrust chief Makan Delrahim virtually to his face by saying that he hadn’t realized how “the world has changed” in broadcast regulation.
Although the merger agreement anticipated that Sinclair would have to divest stations in 10 markets where it would otherwise end up with multiple stations, Sinclair kept dithering on this commitment, and finally proposed station sales that the FCC commissioners unanimously questioned as “ ‘sham’ transactions” that would result in Sinclair effectively retaining ownership.
Two of the proposed sales were especially dubious. Sinclair proposed to sell WPIX, a big New York station, to Cunningham Broadcasting Corp., which turned out to be the owner of several stations operated by Sinclair, had millions of dollars in debt guaranteed by Sinclair, and had been controlled by the estate of the late mother of David Smith, Sinclair’s executive chairman, until January 2018.
Then there was the sale of WGN, a Chicago station that was Tribune’s flagship. Sinclair’s buyer was one Steven Fader, a partner of Smith’s in a car dealership who had no broadcasting experience. That was “precisely why Sinclair chose him to ‘purchase’ WGN,” Tribune alleges. (The quotes around “purchase” are Tribune’s.)
Sinclair didn’t disclose all the connections between its chairman and the buyers at first, which further ticked off the FCC, leading the commission to suggest that the sale proposals smacked of “potential… misrepresentation or lack of candor.” That cast doubt, the FCC said, on whether granting any Sinclair applications would “be in the public interest.”
Regarding WGN, the commission stated, “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.”
By the way, the sale price was $60 million, which the FCC thought suspiciously far below market value — it noted that a lower-ranked Chicago TV station had been sold to Fox in 2002 for $425 million.
Meanwhile, Tribune executives were becoming distinctly exasperated with their Sinclair counterparts. That was especially so after a conference call in mid-December when a DOJ official told representatives of both companies that if Sinclair would only follow through on divestitures in the 10 key markets, “We would be done.” In other words, DOJ would greenlight the deal. Instead, Sinclair offered to divest in only three and threatened to sue the DOJ if that wasn’t good enough. It wasn’t.
A few days after the call, Tribune General Counsel Edward Lazarus wrote Barry Faber, the general counsel of Sinclair, to say that while Tribune was willing to afford Sinclair some flexibility in talks with the government, “we are not willing to countenance… your current path” of shaking off DOJ suggestions and threatening to litigate.
Faber essentially blew off Lazarus that very day, crisply informing him that he must have “misunderstood” the department’s willingness to approve the deal and stating Sinclair was waiting for the DOJ to “become more reasonable.” A few days later, after Lazarus wrote him again to warn that Sinclair’s strategy had “led only to backward movement by the Department, Faber sent him an email brusquely stating, “I do not intend to waste time responding to your most recent letter.”
There wasn’t much more room for the deal to go downhill, but it did anyway. Finally, on July 16 the FCC’s Pai announced that he had “serious concerns” about the merger and that as then proposed, it wouldn’t be legal. He said he planned to refer the deal to an administrative law judge, which would delay it so long it was effectively dead.
That made for one of the few regulatory outcomes in the Trump era that advanced, rather than undermined, the public interest. Trump himself was profoundly unhappy about the result, tweeting on July 24 that the FCC’s refusal to approve the deal was “so sad and unfair…. Disgraceful!”