21st Century Fox Exploring Deal With ION Media to Check Sinclair

Twenty-First Century Fox Inc. (FOXA) is considering offloading its local TV station business into a joint venture with privately held broadcast station owner ION Media Networks Inc., according to a person familiar with the situation.

The idea of creating a separate entity to manage Fox Television Stations LLC -- which holds 28 Fox, MyNetworkTV, CW and independent stations -- isn't a new one but has become more pressing given the likelihood that Sinclair Broadcast Group Inc. (SGBI)  will get regulatory approval for its acquisition of Tribune Media Co. (TRCO) . 

Fox, which came up short in its own pursuit of Tribune, has reached out to Ion about a joint venture given that Sinclair stands to own TV stations that would account for 30% of Fox's local network group if it successfully closed the Tribune Media deal. Sinclair's ownership of Fox-affiliated networks would make it the largest owner of local stations tied to any one of the four major broadcasters.

Fox and Ion declined to comment on the possibility of a deal, which was reported on Wednesday, Aug. 2, by Bloomberg. Sinclair didn't reply to requests for comment.

If Fox and ION do work out a deal, they would create a separate entity to manage Fox's local stations, including its affiliates in New York and Los Angeles, along with more than 60 Fox and other stations owned by Ion. And if Fox were to not renew its 26 affiliate agreements with Sinclair, it could hypothetically switch those contracts to stations owned by ION. Those agreements with Sinclair come up for renewal this year.

At present, Sinclair is poised to combine its 26 Fox stations with the 14 Fox affiliates owned by Tribune Media in cities including Cleveland; Denver; Indianapolis; Sacramento, Calif.; and Seattle.

Importantly, Fox would not contribute cash to such a joint venture but would manage the stations separate from its network, its cable-TV group headed by the Fox News Channel as well as the 20th Century Fox film studio and its holdings in Europe and India. The joint-venture could allow Fox to exert more control over the amount of money its affiliates pay the network for content including the National Football League. Less cash paid to affiliates could in turn free up money for programming, which has become an increasingly large drag on earnings at major media companies. 

If initial market reaction is any indication, investors appear to believe such a deal would be a negative for Sinclair, given that its shares tumbled 8.6% to $31.90 on Thursday. Fox was little changed at $28.82.

Fox considered a similar transaction with Blackstone Group LP (BX) in April when Tribune Media was entertaining buyout offers. Fox was interested in acquiring Tribune Media  to buy back more of its own stations.

Sinclair's acquisition of Tribune Media, valued at $6.6 billion including debt, is under review at the antitrust division of the Department of Justice. Sinclair CEO Chris Ripley said in May when the deal was announced that the most likely markets where regulators would seek a divestiture would be St. Louis, Salt Lake City and Wilkes-Barre, Pa. Tribune owns Fox affiliates in St. Louis and Salt Lake City.

Fox ultimately might choose not to pursue a venture with Ion and opt instead to buy back select affiliates from Sinclair if the DOJ required it to sell certain stations as part of an antitrust agreement to secure approval of the Tribune Media deal. 

A Fox-Ion joint venture would create a supergroup of broadcast TV networks that would rival or even surpass the reach of Sinclair, currently the country's largest TV station owner. The group would have roughly 100 stations covering nearly all of the country's major and midsize markets.

Besides being better able to dictate fees to affiliates, the joint venture would allow Fox a means to transfer the financial results of its lower-growth stations off its books.

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