Please ensure Javascript is enabled for purposes of website accessibility
Sinclair Broadcast Group building in Hunt Valley. (File photo)

Sinclair mulls impact of FCC rulings

Changes could limit the broadcaster’s acquisition plans

Sinclair Broadcast Group Inc. was on a buying spree until recently, acquiring television stations and broadcast groups to grow its audience.

But the Hunt Valley-based company will have to change course following the Federal Communication Commission’s recent decisions about broadcast rules. The rules govern sharing agreements between television stations and the limitations on the number of television stations a broadcaster can own. And they hamper Sinclair’s ability to grow at the pace it has been.

In an earnings conference call with investors Wednesday, Sinclair’s leaders addressed how these rule changes would affect the company’s plans and said they may be challenged.

“It’s hard to tell where all of those things are going to go, where they’re going to end up,” said President and CEO David Smith. “But it may be reasonable to assume that they’re going to end up in some venue, some place in front of a judge.”

The National Association of Broadcasters has spoken out against the FCC’s recent decision on joint sharing agreements, which says any broadcaster that sells 15 percent or more of a station’s advertising will be considered an owner of that station. That becomes a problem for some broadcasters due to limits on the number of stations they can own in a particular market.

In order to follow that rule, and complete its previously announced acquisitions, Sinclair is forced to sell some stations. Smith has said that the impact of selling these stations will be immaterial to the company.

The company has previously said that joint service agreements account for 10 percent of revenue.

FCC officials have said that these agreements hamper competition. But the NAB has defended joint sharing agreements, saying that they provide crucial resources to small, local television stations, allowing them to survive.

“It’s arbitrary and bizarre,” said Howard Rosencrans, founder and chief research analyst at Value Advisory LLC. “I don’t know what prompted them to hang the broadcasters.”

Meanwhile, in September, the FCC effectively eliminated a so-called discount, which allowed broadcasters like Sinclair to make the most of the television ownership cap.

Broadcasters are prohibited from owning enough stations to reach more than 39 percent of households in the United States. Until recently, some of those channels, called UHF channels, only counted for half of the viewership they actually got, which allowed broadcasters to stretch the cap.

“The hard 39 percent cap, that will take Sinclair out of the acquisition game for all intents and purposes,” said Rosencrans.

Sinclair said in February 2013 that its television group reached 27.4 percent of American households. When its pending acquisitions close, that reach will climb 38.9 percent.

But for regulatory purposes that percentage would have been in the mid-20s with the UHF discount.

“The 39 percent cap is kind of ridiculous,” Smith told investors. “Phone companies reach 100 percent of the country. Satellite guys reach 100 percent … cable guys do whatever they want to do and broadcasters are restrained.”

Sinclair said in its earnings report that one of the company’s main focuses is lobbying to reform the limits on broadcast ownership.

While the 39 percent cap is in place the company plans to expand its digital offerings and other media, said Chief Operating Officer David Amy.

“I don’t consider them a front runner from a digital standpoint,” said Rosencrans. “They need to do more in mobile. They need to do more on the net. They need to utilize their spectrum more.”

The company still has an interesting story and a promising future, he said, even with regulations putting a damper on expansion. He pointed to the company’s success in retransmission revenue and the ample political advertising revenue pouring in this year.

“Really the story gets lost,” he said. “They bought 3 million shares of stock in the quarter … that’s a big statement that the outlook of the business is excellent.”