Sinclair emerges as a major broadcasting player

• The low-profile%2C Baltimore area-based company owns more TV stations than anyone else
• FCC wants to further restrict the number of stations broadcasters can own
• Sinclair gets prominent DC-market reach with acquisitions from Allbritton Communciations

During an analyst conference call in August, David Smith, CEO of Sinclair Broadcast Group, downplayed a possible new federal rule that could prevent the fast-growing company from buying up more stations. "I am not concerned about it right now," he said.

Pressed on the issue, Smith struck a more defiant note. "When you look at trying to constrain broadcasters in this competitive landscape today, to me, it doesn't make a lot of sense," he said. "We really need to be unshackled from that in order to compete against these (cable, satellite and phone) companies."

Smith's aggressive buying binge in recent months has shown that the unshackling of Sinclair is well underway, a development that pleases investors but has regulators and media watchdogs on alert.

In the last 2½ years, Sinclair nearly doubled its portfolio of TV stations to 108 from 58, becoming the largest broadcaster in terms of number of stations. It will own and operate 149 stations when its pending deals are completed.

"They're definitely entering big-time," says Craig Aaron, CEO of Free Press, a media watchdog organization.

With interest rates low and ad dollars plentiful, Sinclair is hardly alone in scooping up TV stations. Other companies — including Gannett, Media General, Nexstar Broadcasting and Tribune Co. — also have bought or announced deals to acquire more stations this year. (Gannett owns USA TODAY.)

But Sinclair's singularly torrid pace of growth has fueled debate about enduring questions on concentration of media ownership and fresh attempts by federal regulators to scale back broadcasters' ambitions.

Sinclair's reach beyond its traditional domain of small-to-midsize markets is also triggering a particular set of worries for media critics, who recall Smith's conservative politics seeping into his stations' coverage in the past. Sinclair executives didn't respond to repeated requests for comment for this story.

Founded by David Smith's father, Julian Sinclair Smith, the company started with one small local station in Baltimore in 1971 and has retained its strong roots in the area. David Smith and his brothers took control of the company in the 1990s and began expanding it by acquiring stations. Sinclair started offering its shares to the public in 1995. But the Smith family firmly controls the company, with a majority stake in its shares. Four of the eight seats on the board are occupied by David Smith and his brothers.

Sinclair's acquisitive mode has been good for investors. Its stock more than doubled — up about 136% — in the last 12 months. Its revenue for the first six months of the year is up 26% from a year ago to $596.8 million.

Particularly eye-opening — and perhaps most illustrative of Sinclair's ambition — is a deal announced in late July to buy the seven stations owned by Allbritton Communications for $985 million. It would give Smith a foothold in the influential Washington, D.C.-market that would be used for a broader national expansion. The deal is expected to close by the end of the year.

Allbritton's WJLA is a premier ABC affiliate, and its NewsChannel 8 is a cable news channel in the D.C. region that pumps out 24 hours of news that could be used by Sinclair to support smaller stations. Smith has suggested that it could provide the framework for establishing a national cable news channel, heightening the company's reach.

Rich revenue sources

The bright outlook for the TV ad market, especially with the lucrative political ads delivered every two years in key swing states, has spurred the industry buying binge. Over-the-air local TV ad revenue grew 13% last year, thanks in part to political ads, says Mark Fratrik, vice president of media and technology research firm BIA/Kelsey.

Skyrocketing retransmission consent fees — paid by cable and satellite TV providers to stations for the rights to carry their signals — have also prompted station owners to grow. "There's advantage to scale in dealing with cable and satellite companies," says Harry Jessell, editor of TVNewsCheck.com. "The networks also treat you better if you're bigger."

But if federal regulators have their way, the industry's big players, including Sinclair, could be forced to rein in their ambitions.

Under current FCC rules, the reach of a broadcaster's TV stations may not exceed 39% of U.S. households. But broadcasters have been allowed to count UHF stations as having only 50% of the reach of VHF stations. UHF signals didn't cover as much ground when stations were still broadcasting in analog signals.

The prevalence of digital signals now makes the UHF-VHF distinction largely moot, and the FCC has plans to eliminate the UHF discount. "It's most likely going away," says Marci Ryvicker, a media analyst at Wells Fargo."Sinclair is probably going to be impacted."

If the discount is eliminated, Sinclair's total U.S. household reach — if counting all 149 stations — will jump overnight to about 38.2%, bringing it awfully close to that 39% limit. With the discount, Sinclair's reach would be about 22%.

Smith vows to fight the change. Cable and phone companies are increasingly encroaching on broadcasters' business territory without such restrictions, he said. "Frankly, I am OK with that," Smith said during the August call. "But let us go. Let us go compete."

If the UHF-discount ban goes into effect, as is widely expected, Sinclair may turn to an old industry maneuver to find other ways to continue to mushroom, says Larry Patrick, managing director of industry consulting firm Patrick Communications.

The FCC prohibits the owner of a station that is among the top four in local viewership to buy another top-four station in the same market. Broadcasters have relied on "shared services agreements" or "local marketing agreements" to get around the restrictions.

In such arrangements, a broadcaster buying a station can recruit or create a separate corporate entity to own the station. In return for a fee, the broadcaster then provides a range of services for the station owner, ranging from merely selling ads and negotiating retransmission fees to assuming editorial operations.

"Broadcasting companies are consolidating and essentially obtaining control of other licenses through shell companies," says Matt Polka, CEO of the American Cable Association.

Sinclair was a pioneer of the maneuver. It has a joint services agreement with Cunningham Broadcasting, which is controlled by the Smith family's trusts. If the UHF discount goes away, "Sinclair can grow through Cunningham," Patrick says.

(Gannett has similar arrangements. In June, Gannett agreed to buy 20 stations from Belo in a $1.5 billion deal and assume $715 million of its debt. The deal included a provision to sell several stations to former Belo executive Jack Sander in a shared services agreement.)

Who's in charge?

Cable companies and media critics, such as Aaron, say the practice has been abused by broadcasters in pursuit of industry consolidation. They argue that shared service agreements erode stations' independence and programming quality because one company controls multiple voices. "If all three stations have the same point of view, then you have a diversity problem," says Harold Feld, senior vice president at consumer advocacy organization Public Knowledge. "We've seen local news drop off as a result of these agreements."

Fratrick of BIA/Kelsey defends the practice. Without the help of larger partners, struggling stations might not be able to afford to produce content. "Opponents may argue you're losing a voice. I don't believe it's true. A station may not be providing a news program on its own."

Editorial independence remains a particularly thorny issue for Sinclair. In 2004, the company came under fire for forcing its stations to air a documentary that was critical of the military service of then-Democratic presidential candidate John Kerry. Sinclair also refused to air a a segment of ABC News' Nightline, in which the names of U.S. servicemen and women killed in Iraq were read.

But Patrick suggests such behavior might be a thing of the past. "Attracting controversy is just not worth it," he says. "I think (Smith) has definitely toned it down."

Ryvicker of Wells Fargo says Sinclair has improved some of the stations it has snapped up, beefing up the staff and and investing to boost quality. "A lot of the assets weren't run properly (pre-Sinclair)," she says. "They're making proper investments."

But Sinclair's "agenda-driven" ways still occasionally resurface, Aaron says The night before the 2012 presidential election, its stations aired a news package that criticized President Obama's health care law and the administration's handling of a terrorist attack at the U.S. embassy in Benghazi, Libya.

Despite its rapid expansion, Sinclair has maintained a low profile. But as the regulatory landscape shifts and the company gains larger audiences beyond its comfort zones in the South and the Midwest, it will be increasingly difficult to avoid the spotlight.