Broadcast station owners want to consolidate them. They struggle to close deals

The broadcast TV industry realizes it needs to consolidate. She’s just struggling with how to do it.

In August, nexstar media group, The largest U.S. broadcast station owner has announced a proposed $6.2 billion buyout Tegna – A combination that will bring together more than 260 stations across the United States

last week, Sinclairowner of 179 local television affiliates, has made a hostile bid to take over its smaller counterpart E. W. Scripps After purchasing approximately 10% of the company on the open market.

Both potential deals remain in limbo, and executives are concerned.

Companies like Sinclair and Nexstar operate stations affiliated with major networks across the United States known for local news, sports, and other broadcast content. They face the same headwinds as their cable and content studio counterparts – a shrinking number of pay-TV customers due to the rise of streaming options and technology.

Broadcast station owners remain profitable, largely due to the exorbitant fees they receive from pay-TV distributors.

About 65 million American households still subscribe to a combination of linear television networks. Between 33% and 50% of a broadcaster group’s annual revenue stems from rebroadcast fees – payments made to a broadcaster to include local TV affiliates in pay-TV packages – with advertising making up most of the rest.

However, the profitability of these companies is shrinking as the number of subscribers to traditional packages shrinks. The broadcast strategy for local news and television has not yet been integrated, and like other parts of the media, local newsrooms and their resources are dwindling.

This has made station owners desperate to merge, just as it is the case with the largest media companies – incl paramount, Warner Bros. Discovery and Comcast NBCUniversal – continuing to plan its potential mergers. The motivation for the deals among station owners is to reduce duplicate costs, add scale to their business, and increase negotiating power when it comes time to renew carriage with larger pay-TV providers like Comcast, charter, Google YouTube TV and DirecTV.

While some face regulatory headwinds, for Sinclair, it is the dynamics of family ownership coupled with cultural and governance issues that have complicated its recent efforts to buy volume.

Sinclair has been searching for an acquisition target for nearly a year.

The company announced in August that it would launch a strategic review with the aim of merging its broadcast station business with a peer. By that point, Sinclair and its advisers had already been in discussions with potential merger partners, CNBC previously reported.

It was one of those goals Gray mediaAccording to people familiar with the matter who spoke on the condition of anonymity about the internal plans. But talks with Gray have not progressed, the people said, with Gray already awaiting government approval for a much smaller deal and in no rush to explore another.

Sinclair then set its sights on Scripps, owner of more than 60 stations and a variety of entertainment channels such as Ion and Bounce. Deal discussions began last year, according to people familiar with the matter.

Initial talks revolved around creating a company in which the Scripps family and the Smith family, which owns majority voting shares in Sinclair, would give up majority control of the combined company but remain involved, according to people familiar with the matter.

Those early talks included creating an independent board responsible for making pivotal business decisions, such as whether and when to preempt national programs. In September, Sinclair and Nexstar pre-empted episodes of “Jimmy Kimmel Live!” After the late night host made controversial comments following the assassination of conservative activist Charlie Kirk.

During discussions of the Scripps deal, Sinclair proposed three different forms of the deal, including different terms on who would remain as CEO and whether the deal would be structured as a merger or acquisition, the people familiar with the matter said.

The Scripps family ultimately declined, partly because of governance issues and cultural concerns, two of the people said. In particular, the controlling Sinclair family is known for its conservative politics. In 2018, Sinclair made all of its owned stations broadcast so-called “must play” — comments that sometimes echoed the views of then-US President Donald Trump. That same year, Sinclair’s attempt to take over Tribune ultimately failed amid FCC concerns and criticism from Democrats and public advocacy groups over whether the merger was in the public interest.

“I think there’s a lot of complexity in any transaction, especially transactions involving family-controlled public companies with highly leveraged balance sheets,” Scripps CFO Jason Coombs said during Wells Fargo’s TMT Summit in November. “I think they will add some complexity around a variety of issues, whether that’s economic divisions, whether that’s the impacts on the capital structure and the capabilities there, or whether it’s governance issues. There’s a whole range of issues.”

When the discussions died down in September, Sinclair began buying Scripps stock weekly until its stake was about 8% and it had to go public, according to the Securities and Exchange Commission. Sinclair currently owns a 9.9% stake in Scripps. Sinclair publicly announced last month that it would pursue a deal hostile to Scripps.

In the days following Sinclair’s public offer to acquire Scripps for $7 per share—or more than $580 million—Scripps adopted a shareholder rights plan, known as a “poison pill,” to give it more time to consider the offer.

“We believe the strategic and financial rationale for the potential combination of Sinclair and Scripps is uncontested,” Sinclair said in a statement last week. “Given the family control of Scripps, the only effect of adopting a poison pill is to limit liquidity opportunities for Scripps’ public shareholders.”

A Scripps spokesman said Wednesday that the company adopted the poison pill “to ensure that all shareholders receive full value with respect to any proposal to acquire the company.” The spokesman said the plan aims to avoid “coercive tactics” and expires after a year.

There may be an additional layer of complexity as well.

After Sinclair’s filing with the Securities and Exchange Commission revealed that it had amassed a stake 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 a nondisclosure agreement and Sinclair received nonpublic information, the letter noted, the people said.

It remains unclear when Sinclair stopped receiving non-public information, as well as the specific details of the non-disclosure agreement. That leaves open to interpretation whether Sinclair’s latest maneuver constitutes a securities violation, according to attorney Jonathan Hochman, founding partner of Schindler Cohen & Hochman.

“Assuming Sinclair received confidential information from Scripps under a nondisclosure agreement, whether any of that information is material and not outdated is interesting, because if so, buying Scripps stock while in possession of that information looks a lot like insider trading,” said Hochman, who was not involved in the Sinclair-Scripps matter.

Representatives for Sinclair and Scripps declined to comment.

Beyond complex deal structures and family ownership dynamics, the biggest obstacle to broadcast station mergers in general is US law.

The FCC currently prohibits any company from owning broadcast stations that reach more than 39% of television households in the United States.

That threshold doesn’t threaten a potential merger between Sinclair and Scripps — which Sinclair said would easily win regulatory approval — but it does put Nexstar’s proposed acquisition of Tegna at risk. In order to move forward, a Nexstar deal will require lifting a decades-old FCC rule, or at least significant concessions.

“We are focused on achieving deregulation, and continue to advocate for removing outdated restrictions on local TV ownership as the best solution to level the competitive playing field for all media,” Nexstar CEO Perry Sock said in a November statement when seeking approval of the Tegna deal.

In addition to the 39% nationwide cap, broadcasters also want to repeal another law on the books that prevents a single company from owning three or more affiliates of ABC, CBS, Fox or NBC in a given media market.

FCC Chairman Brendan Carr has been vocal about his support for reforming the laws. In one case earlier this year, Carr reportedly called ownership caps “vague and artificial limits,” adding that such rules “don’t apply to big tech companies.”

In late September, the FCC said it would review ownership rules. But the changes have not yet occurred, and the voice of opposition has become louder.

In addition, the Justice Department has also been slow to move toward approving deals in the industry, creating a hurdle for deals of all sizes, one of the people said.

Trump recently criticized the proposed merger of the industry in a post on Truth Social. Meanwhile, Chris Ruddy, CEO of a conservative TV channel Newsmax A Trump supporter, he opposes FCC rule changes, arguing that consolidation limits the number of potential votes and raises cable prices for Americans by giving more influence to affiliated groups.

A representative for Carr did not respond to requests for comment.

The argument against such mergers from pay-TV distributors is that higher fees are passed on to consumers, which would likely amplify the bleeding of traditional package customers. They also say it’s unclear how consolidating these companies will help the local news industry, station owners say.

“Sinclair is brazenly pursuing a huge footprint nationally and in local markets across the country, which will allow it to charge more expensive retransmission approval fees,” Grant Spielmeyer, president and CEO of the American Communications Association, a distributor advocacy group, said in a statement. “These higher prices will leave consumers with an agonizing choice — either pay or lose their programming.”

Local broadcasters “are not asking for special treatment; we are asking for the ability to compete in today’s media landscape,” Curtis Leggett, president and CEO of the National Association of Broadcasters, the industry’s trade association, said in a statement to CNBC.

“Lifting the arbitrary 39% cap, which only applies to broadcast stations, will allow station groups to invest in local journalism, sports rights and technology that keeps communities informed during emergencies, especially in small markets,” he added. “The national cap was imposed during an era before broadband and streaming reshaped how Americans got their news, and the longer Washington delays addressing it, 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. Versant will become the new parent company of CNBC based on Comcast’s planned spin-off of Versant.