Station owners want consolidation. they have a hard time closing deals

The television broadcast industry recognizes the need for consolidation. However, I’m having trouble figuring out how to make it.

In August, Nexstar Media Group, Largest owner of US broadcast stations announces $6.2 billion takeover offer Tegna — The combination brings together more than 260 stations across the United States.

last week, sinclairThe company, owner of 179 local TV affiliates, made a hostile offer to buy a smaller peer company. E.W. Scripps After acquiring nearly 10% of the company in the open market.

Both potential deals are still stalled, leaving executives worried.

Companies like Sinclair and Nexstar operate affiliates of major networks across the country known for local news, sports, and other broadcast content. They face the same headwinds as cable TV and content studios: a decline in pay-TV customers due to the rise of streaming and technology options.

Broadcast station owners continue to make profits primarily through the high fees they receive from pay-TV distributors.

Approximately 65 million U.S. households still subscribe to a set of linear TV networks. Between 33% and 50% of broadcaster groups’ annual revenue comes from retransmission fees (fees paid to broadcasters to include local TV affiliates in pay-TV bundles), with advertising making up the bulk of the rest.

But as the size of traditional bundle subscribers shrinks, these companies’ profitability is shrinking. Streaming strategies for local news and television have yet to come together, and like the rest of the media, local newsrooms and their resources are dwindling.

So broadcast station owners, like the biggest media companies, are eager to consolidate. paramount, warner bros discovery and comcast’s NBCUniversal — continues to plan its own potential merger. The driving force behind the deal between station owners is to reduce duplicative costs, increase business scale, and increase bargaining power when it’s time for fleet renewals with the largest pay-TV providers such as Comcast. charter, Google YouTube TV and DirecTV.

While some companies face regulatory headwinds, for Sinclair, family ownership dynamics and culture and governance issues complicate recent efforts to acquire scale.

Sinclair has been searching for a buyer for nearly a year.

In August, the company announced that it would begin a strategic review aimed at integrating its broadcasting business with other companies in the same industry. By that point, Sinclair and its advisers were already in talks with potential merger partners, CNBC previously reported.

One of the targets is gray mediaAccording to the people, who spoke on condition of anonymity to discuss internal plans. But talks with Mr. Gray have not progressed because he is already awaiting government approval for a much smaller deal and is in no hurry to pursue another deal, the people said.

Sinclair then set his sights on Scripps, owner of more than 60 broadcast stations and various entertainment channels such as Aeon and Bounce. Negotiations on the agreement began last year, according to people familiar with the matter.

Initial discussions centered on creating a company in which both the Scripps family and the Smith family, which owns a majority of Sinclair’s voting stock, would relinquish majority control of the combined company but would remain involved, according to people familiar with the matter.

These early discussions included the creation of an independent board of directors responsible for critical business decisions, such as whether and when to pre-empt national programming. In September, both Sinclair and Nexstar pre-aired episodes of “Jimmy Kimmel Live!” In the wake of the late night host’s controversial comments following the assassination of conservative activist Charlie Kirk.

Throughout the deal discussions with Scripps, Mr. Sinclair proposed three different variations of the deal, including different terms on who would remain as CEO and whether the deal would consist of a merger or acquisition, the people said.

The Scripps family ultimately balked at the deal, citing governance issues and cultural concerns, two of the people said. In particular, Sinclair’s ruling family is known for its conservative politics. In 2018, Sinclair began broadcasting so-called “must runs” (commentaries that occasionally reflect the views of then and current U.S. presidents) on all of its stations. That same year, an attempt by Sinclair to buy Tribune ultimately failed, following both concerns from the Federal Communications Commission and criticism from Democrats and public advocacy groups over whether the merger was in the public interest.

“I think any transaction, especially one that involves a family-owned public company with a highly leveraged balance sheet, is very complex,” Scripps Chief Financial Officer Jason Combs said at Wells Fargo’s TMT Summit in November. “There will be further complexity around issues such as economic fragmentation, the impact on capital structure and potential, and governance issues. The issues are wide-ranging.”

After the controversy subsided in September, Mr. Sinclair began buying Scripps stock weekly until he owned about 8% of the company and had to go public, according to the Securities and Exchange Commission. Mr. Sinclair currently owns 9.9% of Scripps stock. Sinclair publicly announced last month that it would pursue a hostile deal for Scripps.

Days after Mr. Sinclair made a public offer to buy Scripps for $7 a share, or more than $580 million, Scripps adopted a shareholder rights plan commonly known as a “poison pill” to give it more time to consider the offer.

“We believe there is no dispute that the strategic and financial rationale for a potential merger between Sinclair and Scripps is undisputed,” Sinclair said in a statement last week. “Given Scripps’ family ownership, the only effect of implementing the poison pill is to limit liquidity opportunities for Scripps’ public shareholders.”

A Scripps spokesperson said Wednesday that the company adopted the poison pill “to ensure that all shareholders receive full value in connection with the proposed acquisition.” The plan aims to avoid “coercion tactics” and expires after a year, a spokesperson said.

There may also be additional layers of complexity.

After an SEC filing revealing that Sinclair had accumulated stakes in Scripps, Scripps’ lawyers sent a letter to Sinclair raising questions about the stock purchase, according to two people familiar with the matter.

As part of early deal discussions, Sinclair and Scripps signed non-disclosure agreements and Sinclair received non-public information, the letter said, according to the people.

It’s unclear when Sinclair stopped receiving nonpublic information, and the specific details of the nondisclosure agreement are unclear. Jonathan Hochman, a lawyer and founding partner at Schindler, Cohen & Hochman, said whether Mr. Sinclair’s latest maneuver constitutes a securities violation is open to interpretation.

“Assuming that Sinclair received confidential information from Scripps under a non-disclosure agreement, it would be interesting to see whether some of that information is material and outdated, because if so, buying Scripps stock while possessing that information would be a lot like insider trading,” said Hochman, who is not involved in the Sinclair-Scripps matter.

Representatives for Mr. Sinclair and Scripps declined to comment.

Beyond complex contract structures and family ownership relationships, the biggest obstacle to broadcast station mergers in general is U.S. law.

The FCC currently prohibits a single company from owning a station that reaches more than 39% of U.S. television households.

The standard does not threaten a potential merger between Sinclair and Scripps, which Sinclair has said would easily win regulatory approval, but it would jeopardize Nexstar’s planned acquisition of Tegna. A deal for Nexstar would require repealing, or at least significant waivers of, decades-old FCC rules.

“We are committed to achieving deregulation and continue to advocate for the removal of outdated restrictions on local television ownership as the best solution to level the playing field for all media,” Nexstar CEO Perry Sooke said in a November release seeking approval for the deal with Tegna.

In addition to the national 39% cap, the broadcasters also want to eliminate another bookkeeping law that prevents one company from owning more than two ABC, CBS, Fox or NBC affiliates in a given media market.

FCC Chairman Brendan Carr has been vocal in his support for changing the law. In one instance earlier this year, Carr reportedly called ownership caps “arcane and artificial restrictions” and added that such rules “do not apply to Big Tech.”

The FCC announced in late September that it would review its ownership rules. But change has not yet occurred, and the voices of opposition are growing louder.

Additionally, the Justice Department has been slow to approve industry deals, creating hurdles for deals of all sizes, one of the people said.

Trump recently slammed proposed industry consolidation in a Truth Social post. Meanwhile, Chris Rudy, CEO of a conservative cable TV channel, said: newsmax A Trump supporter, he opposes the FCC’s rule changes, arguing that consolidation would limit the number of potential speakers and increase the influence of affiliates, driving up Americans’ cable bills.

A representative for Mr. Kerr did not respond to a request for comment.

The argument against such mergers by pay-TV distributors is that higher fees would be passed on to consumers, likely further hemorrhaging traditional bundled customers. It also says it’s unclear how the consolidation of these companies will benefit the local news industry, as station owners have argued.

“Sinclair’s brazen pursuit of massive expansion in the United States and local markets across the country allows it to charge even more exorbitant retransmission consent fees. These high prices force consumers to make painful choices between paying money and losing their programming,” Grant Spellmeier, president and CEO of America’s Communication Association, an advocacy group for distributors, said in a statement.

Curtis LeGate, president and CEO of the National Association of Broadcasters, an industry group, said in a statement to CNBC that local broadcasters “are not looking for special treatment. We want the ability to compete in today’s media environment.”

“Removing the arbitrary 39% limit, which only applies to broadcasters, will allow station groups to invest in local journalism, sports rights and technology that keeps communities informed during emergencies, especially in smaller markets,” he said. “The national cap was imposed in an era before broadband and streaming changed the way Americans get their news, and the longer Washington responds, the harder it will be for local stations to maintain the trusted local news and reporting Americans rely on every day.”

Disclosure: Comcast is the parent company of NBCUniversal, which owns CNBC. With Comcast’s planned Versant spinoff, Versant will become CNBC’s new parent company.