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Sunday, 01 October 2017 16:57

Channel changes? West Michigan TV stations part of planned ‘transformational’ merger that runs afoul of FCC regs

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GRAND RAPIDS — The path to close a $3.9 billion transaction between two giants in the television broadcasting industry could run directly through West Michigan.

Under the proposed deal that was announced in May, Hunt Valley, Md.-based Sinclair Broadcast Group Inc. (Nasdaq: SBGI) will acquire Chicago-based Tribune Media Co. (NYSE: TRCO) in a deal valued at $3.9 billion, plus the assumption of $2.7 billion in debt.

However, because the two companies’ existing operations overlap in 10 markets  — including in  the Grand Rapids-Kalamazoo-Battle Creek designated market area (DMA) — the newly combined operation would be in violation of Federal Communications Commission (FCC) regulations restricting how many broadcast licenses one firm can hold in a certain geographic market.

In West Michigan — the 44th largest television DMA nationwide with 709,670 viewing households, according to a January report from Nielsen — Tribune owns Grand Rapids-based Fox 17 WXMI, a local Fox affiliate, while Sinclair currently holds WWMT Newschannel 3, the Kalamazoo-based CBS affiliate.

In a June document sent to the FCC, Sinclair said the Grand Rapids-Kalamazoo-Battle Creek region was a market in which “Sinclair’s common ownership of the combined stations would exceed the current limits imposed by the Commission’s local television ownership rules.”

Sinclair says it plans to pursue a variety of options to obtain FCC approval for the proposed “transformational” deal, which could include selling some of the stations in markets where the merger would cause the firm to exceed the FCC’s ownership limits.

“To the extent that divestitures may be necessary, applications will be filed upon locating appropriate buyers and signing appropriate purchase agreements,” Sinclair attorneys wrote earlier this year.

At the time this report went to press, it was unclear whether the stations’ current owners had sought bids for either WXMI or WWMT. Spokespeople for Tribune and Sinclair did not respond to requests for comment or declined to speak on the record for this story. Network sources said few details had been shared with employees at the local affiliate level.

In a mid-September letter, the FCC asked Sinclair for further information on topics related to the merger, including its plans to address ownership in the 10 affected markets. The company has until Oct. 5 to respond.

MORE QUESTIONS THAN ANSWERS

Experts in media law said it’s unsurprising that questions continue to arise over how Sinclair will address the ownership issues posed by the FCC.

“These negotiations can go in weird directions,” said Adam Candeub, a professor of law and director of the Intellectual Property, Information & Communications Law Program at Michigan State University in East Lansing.

“If this deal progresses as others certainly have, the typical response would be for some sort of divestiture of local affiliates,” said Candeub, who previously worked as an attorney and adviser for the FCC. “Right now, I’m sure there are a bunch of very highly-paid D.C. lawyers in meetings with commissioners and their staff figuring out what the deal will be.”

One possible outcome is that federal regulators could allow Sinclair to keep all the stations in markets where it exceeds the FCC’s existing ownership restrictions, including West Michigan.

That’s because FCC Chairman Ajit Pai has stated publicly that he’s considering doing away with those regulations, telling media trade publication Variety in March that he views several existing media ownership rules as “quite antiquated.”

It’s unclear if Pai will act on the regulations before the proposed Sinclair-Tribune deal closes. But the Donald Trump appointee to the FCC, who has spoken favorably of large corporate mergers in the past, could seemingly bolster an ally of the administration by paving the way for the deal to occur. The reason: Sinclair is widely regarded as a right-leaning corporation that came out in favor of the president in its political coverage.

A December 2016 analysis by The Washington Post found that the company’s affiliates “gave a disproportionate amount of neutral or favorable coverage to Trump during the campaign while often casting (Democratic candidate Hillary) Clinton in an unfavorable light.”

The Post report also outlined an alleged deal by the Trump campaign to give Sinclair affiliates access to the then-candidate in exchange for favorable coverage. Sinclair executives deny that any such deal existed, according to reports.

BIG AND GETTING BIGGER

With 193 television stations in 89 U.S. markets, Sinclair already functions as one of the largest television broadcasting companies in the country. By adding the Tribune assets, the company says it would cover 72 percent of the country and have annual revenues of about $4.6 billion.

“This is a transformational acquisition for Sinclair that will open up a myriad of opportunities for the company,” President and CEO Chris Ripley said in a statement at the time the deal was announced. “The Tribune stations are highly complementary to Sinclair’s existing footprint and will create a leading nationwide media platform that includes our country’s largest markets.”

As consumers gravitate toward new and emerging digital methods of media consumption, sources say they expect dealmaking and consolidation among media conglomerates to ramp up.

In January, Irving, Texas-based Nexstar Media Group Inc., which owns WOOD TV 8 in Grand Rapids, completed a $4.6 billion acquisition of broadcaster Media General Inc., which required the sale of five stations around the country where it exceeded FCC ownership rules.

In recent months, Verizon Communications Inc. has sought to acquire cable provider Charter Communications, while AT&T announced plans to merge with Time Warner Inc.

“Media economics is grotesquely complex,” MSU’s Candeub said, referring specifically to the Sinclair-Tribune deal.

According to Candeub, the FCC will have to consider questions pertaining to the impact such a merger would have on advertisers and consumers in each of the affected markets.

Ultimately, Candeub said he believes that deals like the proposed Sinclair-Tribune transaction will become par for the course as media companies increasingly seek greater scale and market share.

“If you continue to draw the trend line, you’ll see greater consolidation,” Candeub said. “That’s just the way we’re going. That does raise lots of questions about the future of local news. We’ll see how it goes. But as the internet becomes the dominant vehicle for media delivery, all prior assumptions are out the door.”

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Nick Manes

Staff writer

nmanes@mibiz.com

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