By David Shepardson and Diane Bartz
WASHINGTON (Reuters) - Federal Communications Commission Chairman Ajit Pai said on Monday he had "serious concerns" about Sinclair Broadcast Group Inc’s (SBGI.O) proposed $3.9 billion acquisition of Tribune Media Co (TRCO.N), a surprise move which could potentially scuttle the deal and sent shares of both companies tumbling.
Pai, a Republican, said evidence presented as part of the approval process suggested that the planned divestiture of certain television stations "would allow Sinclair to control those stations in practice, even if not in name, in violation of the law."
Pai, whom Democrats have accused of making a string of decisions benefiting Sinclair, proposed referring the matter to an administrative law judge. The move could result in a lengthy delay and could effectively kill the deal, as in other mergers referred for administrative proceedings.
Sinclair, the top U.S. television broadcast group, said in a statement late Monday it was "shocked and disappointed" by the announcement and denied it was not in compliance with FCC rules. The company said it was "prepared to resolve any perceived issues" and looked "forward to finalizing our acquisition of Tribune Media."
Tribune shares closed down 16.7 percent to $32.12, while Sinclair dropped 11.7 percent to $29.10.
Tribune declined to comment. Pai and Sinclair have previously denied the Democrats' accusations. Democrats have also said the FCC's inspector general is probing the allegations.
Sinclair, which owns 192 stations, said in May 2017 that it planned to acquire Chicago-based Tribune’s 42 TV stations in 33 markets.
In April, Sinclair said it would sell 23 TV stations to obtain the necessary regulatory approvals. It needs FCC permission to own more than one station in some markets.
Pai's statement raising questions about whether Sinclair would continue to control some of the stations it proposes to divest followed similar questions raised in separate filings with the FCC last month by the American Civil Liberties Union and conservative news outlet Newsmax Media.
The deal has come in for sharp criticism that it would lead to significant TV station consolidation in the United States by many Democrats and by the attorneys general of three states who in a filing last month urged the FCC to reject the deal.
Sinclair, based in Hunt Valley, Maryland, has said that if the deal was approved, it would reach nearly 59 percent of the nation’s television households. Sinclair said Monday the deal "will create numerous public interest benefits and help move the broadcast industry forward at a time when it is facing unprecedented challenges."
A majority of the FCC voted Monday to approve the draft order circulated by Pai's office to refer the transaction for a hearing, a person briefed on the matter said.
"It's widely recognized that when something is set for a hearing that the deal is not going to survive," said Gigi Sohn, a top aide to former FCC Chairman Tom Wheeler.
FCC Commissioner Jessica Rosenworcel, a Democrat, said that after a string of policies "custom built" to support Sinclair, “the agency will finally take a hard look at its proposed merger with Tribune.” The draft order circulated by Pai's office, part of which was seen by Reuters, said the deal raised an issue that "includes a potential element of misrepresentation or lack of candor" that must be resolved before the FCC gives it a go-ahead.
That could amount to "misconduct," the order said. The Justice Department's separate review of the merger is still ongoing, the department said Monday.
The draft order raised questions about the divestiture of stations in Dallas and Houston as well as representations made by Sinclair about the divestiture of WGN-TV in Chicago.
Sinclair responded that it denies "such allegations in the strongest possible manner" and said it has been "completely transparent about every aspect of the proposed transaction."
Two FCC officials briefed on the matter said the language in the order made it extremely unlikely that Sinclair would be able to proceed with the merger as planned.
The order "could also (put) pressure on them to divest more stations cleanly in the open market," said Gene Kimmelman, president of the advocacy group Public Knowledge.
Advocacy group Free Press said Sinclair forces stations to "air pro-Trump propaganda" - a charge it denies.
President Donald Trump has defended the conservative-leaning Sinclair, tweeting in April that the company was “far superior to CNN.”
(Reporting by David Shepardson and Diane Bartz; Editing by Jonathan Oatis and Leslie Adler)