By Jessica Toonkel and Liana B. Baker
(Reuters) - Sinclair Broadcast Group Inc has approached rival U.S. broadcaster Tribune Media Co to discuss a potential combination, people familiar with the matter said on Wednesday, a deal that would hinge on existing regulations being relaxed.
A deal between Sinclair and Tribune Media, which have market capitalizations of $3.6 billion and $3 billion respectively, would combine two of the largest U.S. local TV station owners and face regulatory curbs on how many households they can reach.
However, the broadcast industry hopes President Donald Trump will lift caps on ownership concentration, allowing it to compete for audiences and advertisers against Facebook Inc (NASDAQ:FB) and Alphabet (NASDAQ:GOOGL) Inc's Google.
The discussions between the companies are preliminary and there is no certainty they will lead to any deal, the people said.
Sinclair could also look at buying parts of Tribune such as the dozen CW broadcast stations it owns, or its media holdings such as the WGN America cable network and its stake in the Food Network, the people added.
The sources asked not to be identified because the matter is confidential. Tribune Media declined to comment, while Sinclair did not respond to a request for comment.
An acquisition of Tribune would come as the Chicago-based company faces higher programming costs and a challenging advertising environment.
Tribune's chief executive, Peter Liguori, has said he is stepping down this month, and the company has yet to name a permanent replacement. In February, Starboard Value LP, an activist hedge fund known for calling on companies to change their strategy, disclosed a 6.6 percent stake in the company.
Sinclair branched out into cable networks last year when it bought the Tennis Channel for $350 million.
If the companies decide to combine, they would collectively reach more people than the U.S. Federal Communications Commission (FCC) currently allows for. Unless grandfathered in, no broadcast group is allowed to reach more than 39 percent of U.S. households.
However, Congress has increased the cap before, and many in the industry expect Trump to relax the rules on the ownership of broadcast stations. Sinclair and Tribune could also seek a waiver to go above the cap as part of a deal, the sources said.
Tribune is already above the FCC cap, reaching 44 percent of U.S. households, while Sinclair is at 38 percent, according to Jefferies LLC analyst John Janedis.
Tribune Media said last year that it was working with financial advisers, Moelis & Co and Guggenheim Securities, on a strategic review. It subsequently sold its media data unit Gracenote to Nielsen Holdings Plc for $560 million.
Tribune is due to report earnings later on Wednesday.