Sinclair sells its stake in automotive company

Business ties benefiting executives were criticized

June 07, 2005|By Andrea K. Walker | Andrea K. Walker,SUN STAFF

Sinclair Broadcast Group Inc., which has been criticized for intertwined business relationships that benefit its top executives, said yesterday that it is selling its stake in an automotive company owned by its president, David D. Smith.

The Hunt Valley-based broadcaster is selling Atlantic Automotive Corp., in which it invested $20 million in 2002 and of which Smith is the majority owner, to Auto Properties LLC. Auto Properties is an affiliate of Atlantic Automotive, a company of which Smith is also a part-owner.

The deal gets Sinclair, which owns, operates or provides services to 61 television stations in 38 markets, out of the auto business. Smith will maintain a personal stake in Atlantic, which owns a leasing company and dealerships in the Mid-Atlantic region.

Sinclair is selling its 17.5 percent stake in Atlantic for $21.5 million and $2.5 million in dividends. The price represents a 7.75 percent return on the investment. The proceeds of the sale will be used to help pay off company debt, Sinclair said.

The company's stock fell 2 cents to close at $8.60 yesterday on the Nasdaq stock market.

Sinclair executives did not return calls yesterday regarding the transaction. Reached at home yesterday, Martin R. Leader, a member of the board of directors, referred calls to Lucy A. Rutishauser, the company's treasurer and vice president of corporate finance, who did not return calls.

In a statement, Leader said Sinclair invested in the automotive industry because it includes the largest advertisers on television.

"However, a year ago, in response to our shareholders' feedback, the board decided to not make further investment into Atlantic Automotive," Leader said. "This was among the reasons that the independent directors decided to accept the buyout offer."

A committee of Sinclair's independent directors decided to divest from the auto business, the company said.

Sinclair didn't elaborate on why shareholders questioned the relationship with Atlantic. But experts have said that, in general, companies raise suspicion when they do business with their executives. The Securities and Exchange Commission requires public companies to disclose such dealings because of the potential conflict of interest.

Sinclair sold advertising time to Atlantic on Baltimore stations WBFF-TV and WNUV-TV for $500,000 last year. The company also bought $1.1 million in vehicles and related vehicle services from Atlantic last year.

Atlantic leases certain dealership properties from a partnership in which Smith has a 50 percent ownership interest. Atlantic made lease payments of $4.5 million to the partnership last year and said in SEC filings that it expects to make $24.9 million in payments through 2013.

Perceived conflicts might not have been the only reason Sinclair decided to sell Atlantic. Media companies have increasingly left businesses that aren't directly related to their industry in recent years, experts said.

"I don't see this as the separation-between-church-and-state debate that's often been invoked in journalism where you're separating the advertising from the journalism," said Philip Napoli, an associate professor at Fordham University in New York and director of the Donald McGannon Communications Research Center.

One analyst said Sinclair needs to focus more on the broadcast business.

"They shouldn't have been in this business in the first place," said Ivan Feinseth, managing director and director of research at Matrix USA in New York. "This is the right move in the sense that they could be focusing on their value as a broadcast company and not owning a car dealership. They should be looking at ways to monetize their broadcasting assets."

Feinseth said proceeds from the sale wouldn't go far in paying down the nearly $2 billion in debt he said Sinclair has. Feinseth, whose company doesn't own shares of Sinclair stock, has a negative rating on Sinclair stock.

The announcement also raised questions about whether the automotive company was sold at fair value. Business transactions between companies and their executives can raise concerns about whether the executive received favorable treatment compared to other potential buyers.

Two analysts at Legg Mason, Sean P. Butson and Lamont N. Corprew, said they were disappointed with the return.

"While the 7.75 percent return on investment is not as much as we had hoped for, we are pleased that Sinclair is no longer in the auto business and will not be making such investments in the future," the two wrote in a report released yesterday.

A fairness opinion on the value of the investment was obtained from Mercer Capital, an appraisal firm.

Another media specialist said that the transaction seemed straightforward.

"Sinclair probably wanted to divest themselves of having any interest at all," said Roger Caplan, owner of the Caplan Group, an Ellicott City advertising and marketing firm. "I think they probably just wanted to make a clean break from it. Something of that nature their board has to approve. I think if their board is OK with it, I don't see any problems with it."

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