Another blockbuster merger is in trouble. On Thursday morning, Tribune Media Company (NYSE: TRCO) announced that it was backing out of a $3.9 billion deal with Sinclair Broadcast Group and filing suit against the company for breach of contract. In the lawsuit filed in a Chancery, Delaware court, Tribune seeks compensation for losses incurred as a result of material breaches in the merger agreement between the two companies, including Sinclair’s promise to obtain regulatory approval as soon as possible and divesting stations in specific markets to facilitate that approval.
In an August 9 news release, Tribune alleges that “Sinclair engaged in unnecessarily aggressive and protracted negotiations with the Department of Justice and the Federal Communications Commission over regulatory requirements, refused to sell stations in the markets as required to obtain approval, and proposed aggressive divestment structures and related-party sales that were either rejected outright or posed a high risk of rejection and delay – all in derogation of Sinclair’s contractual obligations.”
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The companies originally entered into an agreement in May 2017 with Sinclair agreeing to buy Tribune for cash and stock valued at $43.50 per share, or a total purchase price of approximately $3.9 billion.
In item #2 of its introduction in the complaint, Tribune said the following:
“Sinclair owns the largest number of local television stations of any media company in the United States, and Tribune and Sinclair were well aware that a combination of the two companies would trigger regulatory scrutiny by both the United States Department of Justice (“DOJ”) and the Federal Communications Commission (the “FCC”). Because speed and certainty were critical to Tribune, it conditioned its agreement on obtaining from Sinclair a constrictive set of deal terms obligating Sinclair to use its reasonable best efforts to obtain prompt regulatory clearance of the transaction,” said Tribune.
In item #7 of the complaint, Tribune alleges that Sinclair “repeatedly and willfully breached its contractual obligations in spectacular fashion. In an effort to maintain control over stations it was obligated to sell if advisable to obtain regulatory clearance, Sinclair engaged in belligerent and unnecessarily protracted negotiations with DOJ and the FCC over regulatory requirements, refused to sell stations in the ten specified markets required to obtain approval, and proposed aggressive divestment structures and related-party sales that were either rejected outright or posed a high risk of rejection and delay…”
As we reported in July, the FCC unanimously concluded that Sinclair had either misrepresented or omitted material facts when it applied for regulatory approval to try to circumvent the rules. The FCC put the merger on hold and sent the agreement to an administrative judge to determine if Sinclair misled or intentionally deceived the FCC.
“In light of the FCC’s unanimous decision, referring the issue of Sinclair’s conduct for a hearing before an administrative law judge, our merger cannot be completed within an acceptable timeframe, if ever,” said Peter Kern, Tribune Media CEO, in a statement. “This uncertainty and delay would be detrimental to our company and our shareholders. Accordingly, we have exercised our right to terminate the Merger Agreement, and, by way of our lawsuit, intend to hold Sinclair accountable.”
Because of the FCC’s serious concerns about Sinclair’s handling of the merger, we are not surprised that Tribune Media is backing out. The deal would have given Sinclair control over nearly two-thirds of the entire U.S. television market, according to the Hollywood Reporter. Except for pursuing the lawsuit, it is not clear what Tribune will do next, but for now, the media organization is not for sale.