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Gray Television, like many of its TV station group peers, took it on the chin during the Great Recession.

Unlike many of those other companies, however, Gray’s has had a longer, tougher recovery from the economic sucker punch.

With a current debt-to-cash flow ratio of just under six times, the company is still working on paying down debt and getting its balance sheet in order.

“Gray made a couple of acquisitions at the wrong time and paid full prices,” said one analyst who requested anonymity. “Then they had to refinance at inauspicious times. Now they just have to generate cash and work their way out.”

Thanks to the post-recession return of the automobile advertising and record political year in 2012 ($86 million in political ad spending), Gray appears to be doing just that.

“They’re focused and well run and they’ve consolidated costs,” says Damian Riordan, of Peleton Media Advisors. “They continue to be a cost-conscious operator….Their patience has paid off, but with patience comes a lot of hard work. They’re small-market operators with advantages unique to Gray. They’re well positioned for economic upturns.”

Gray is a pure-play, publicly traded station group with 41 stations (35 full-power and six low-power) in 30 markets. With 2012 revenue of $377 million, it’s No. 18 of the TVNewsCheck-BIA/Kelsey Top 30 Station Groups. The DMAs typically are on the small side: Knoxville, Tenn., (DMA 61) is the biggest; Parkersburg, W. Va., (DMA 193) the smallest.

Hilton Howell is the CEO, but COO Bob Prather, who along with Howell’s father-in-law J. Mack Robinson acquired control on the company in 1993, is better known — the man about the industry (see related story).

A case of bad timing

Gray’s troubles can be traced to 2005, before the economic storm clouds appeared on the horizon, when it stretched to make two big buys — WSAZ Charleston-Huntington, W. Va., (DMA 65) for $186 million; and WNDU South Bend, Ind., (DMA 95) for $85 million.

It was a time when private-equity players were snapping up stations like crack addicts on a binge, in the process ratcheting up transaction valuations as high as 15 times average even-odd year cash flows.

When the economy tanked a few years later, there was a lot of carnage. Excessive debt and shortfalls in ad revenue pushed Young, Pappas, New Vision and others into bankruptcy.

Gray found itself looking over the edge.

“In 2009, we broke covenants on our loan agreements,” Prather recalls. “It was a very sobering time. It made me a lot more conservative than I had been. I always thought television would keep growing. I thought it wouldn’t fall backwards, would hold its own. I don’t think anybody realized how deep the recession would be.

“I don’t think the growth rate we had 10 years ago will ever come back.”

Gray overindulged on debt, but one key move may have saved it: In late 2005, the company spun off five small, daily newspapers at a time when most multi-media companies were still bullish on the print business.

“We got a $40 million dividend for the newspapers,” Prather says. “The guy who ran that business thought newspapers were going into decline. But I don’t think anyone saw how quickly that would happen.”

Was that $40 million the difference between solvency and Chapter 11? Maybe not, but it didn’t hurt. Gray shares sank as low as 18 cents during the depth of the recession and the New York Stock Exchange, where those shares are traded, threatened to delist the company at one point. (Yesterday, those share closed at $5.78.)

No question those were dark days and in today’s recharged climate of multi-million dollar M&A deals, Gray’s has had to sit out the early part of the game.

Prather clearly wishes it were otherwise. But a chat he had with Warren Buffett a year or so ago helped put things in perspective.

“I told him I bought South Bend and Charleston and may have overpaid,” Prather recalls. “He said anybody who bought anything in the last five years overpaid.

“Those are two of my best stations and I wouldn’t want to not own them. I don’t regret doing it.”

That’s not to say that, in hindsight, there aren’t some things he’d do differently.

One is he would have sold equity when the stock was at $10.50-$11 and used proceeds to pay down debt. Another is that he would have hung onto $40 million in convertible preferred stock instead of converting it into debt.

“We would have been $40 million less in debt,” he says.

The turnaround

Getting the financial house in order is Gray’s top priority.

First, the company is using virtually all its free cash flow to pay down debt, knocking out $70 million last year, $20 million this year and another $70 million to $75 million next year.

Second, the technological innovations Gray has implemented have been key in cutting costs, say Prather.

“We’ve reduced head count since 2009 by about 15% and virtually all of that has come through technology,” he says. “We’ve actually added news hours. We think we’re on the cutting edge with technology. We’re not only containing costs but cutting them.”

Third, Gray has redeemed its 10.5% senior notes as part of a $300 million refinancing that lowered the interest rate to 7.5% and its interest payments. Gray also completed a $20 million repurchase of preferred stock. 

Now, Gray is growing again, albeit stealthily.

Last year, Gray signed affiliation agreements with CBS for three stations it already owned: WECP Panama City, Fla.; WSVF Harrisonburg, Va.; and WIYE Parkersburg, W. Va. The CBS channels are on the digital tier.

Those agreements made Gray the owner of more CBS affiliates than any other group. It negotiated cable and satellite carriage for the channels and, most important, full retrans payments for all three.

Gray also purchased two low-power stations for minimal amounts, negotiating cable and satellite carriage for both. One was the $1.3 million acquisition of KSNB North Platte, Neb., for which Gray picked up the CBS affiliation.

A second recent addition, for just $600,000, was WDON Dothan, Ala., where Gray renewed the NBC affiliation.

Prather says both stations had been off the air when Gray purchased them.

Staying the management course

The tough times may have tested Gray’s mettle, but they didn’t alter its fundamental approach, says CEO Howell.

“Even during the darkest moments of the Great Recession, we continued to invest in our assets from a technology standpoint,” Howell says. “We’ll continue to do that. We’ll continue to make sure our products are second to none in our markets.”

In fact, Gray stations are No. 1 or No. 2 in news or overall at all stations except one. (Somewhat ironically, that station is WSWG Albany, Ga., (DMA 150) where Gray has its administrative offices.

While the markets may be small — other DMAs include Lexington, Ky.; Lansing, Mich.; Colorado Springs; Reno, Nev.; Madison, Wis. — they tend to be college towns or state capitals (or both). That’s no accident. The Gray playbook says such markets are more economically stable.

Prather says another key element of the Gray approach is decentralization. “We wanted to hire good general managers and let them run operations autonomously. We have followed that to a T so far.”

Gray’s top management is so thin — CEO, COO and CFO plus vice presidents for law, technology and national sales — it’s almost anorexic. That may have been a strategic decision early on but it’s become a core piece of corporate culture.

Gray uses seven regional vice president-general managers to oversee station operations.

“The only thing between the COO and the general managers are the regional vice presidents,” says Don Ray, the general manager-regional VP at WSAZ in Charleston, W.Va. “The regional managers visit the stations at least quarterly. The focus is on accountability — where you want to go, how you’re going to get there. It’s a nice system.”

Gray’s management style has earned it praise not only in financial circles but also among its peers.

“We compete with them in a market or two,” says Randy Bongarten, head of Bonten Media. “They are good, tough, smart. I have the greatest respect for Bob Prather and for management there.

“They’re thin at the top, decentralized, innovative from a technology standpoint. They’re not just focused on cutting costs. They’re focused on running the television business. They’re cutting costs when they can, making investments when they can.”

Gray Model 2.0

Using technology to maintain news leadership and reduce costs is another element of the Gray strategy. It’s execution falls to Jim Ocon, who has been the go-to guy for tech since Prather lured him away from Turner Entertainment in 2005.

Since then, Ocon’s has been developing and deploying what he calls Gray Model 2.0. That includes converting to HD at nearly all the stations; automating (Ocon prefers to say “eliminating”) conventional master control so that work that used to require eight people is now handled by one or two; and converting in-house traffic systems to a hub-and-spoke system.

“Because of the culture, Bob Prather always encouraged me to innovate,” Ocon says. “Innovation to me is a job.”

A couple years back, during an NAB conference, Ocon was lamenting the fact that reporters in the field had to dig through a lot of gear to get what they needed to do their jobs. His idea: Put everything in a single backpack.

Ocon enlisted help from electronics giant Sony to develop the MOCOM (mobile communications) backpack. The backpack includes a tablet, smartphone, laptop, camcorder and light. Now, not only can a single Gray reporter do the work of two or three, there’s no need to go on a gear scavenger hunt before going into the field.

Newsgathering is only part of the equation. Getting the news — data and images — back to the station where it can be broadcast is the other.

Traditionally, that’s been done with microwave and satellite trucks. Such trucks, which can cost upwards of $300,000 each. Bad weather or overburdened networks can be a problem.

Ocon latest is GrayMax, a proprietary IP-based microwave system that rides on an SUV.

The GrayMax system could be a game-changer. In addition to providing one more path for getting data and video back to the station it can dramatically reduce the need for those expensive live trucks.

“It’s the first of its kind in country and has the potential to change the industry,” says Ocon. “You hear a lot about spectrum efficiency, repacking, how cellular systems are not always reliable. This is basically a dedicated cellular communications system for people in the field to communicate with the station.”

Under an FCC experimental license, Gray recently deployed its first GrayMax equipped vehicle — a Honda Element — at KBTX Bryant, Texas, for a two-year test.

Next up? The Furio newsroom featuring motion tracking of cameras tied to graphics, robotically controlled cameras and augmented and virtual reality. “We think it will provide a competitive advantage and appeal to viewers being brought up on graphically rich environments,” Ocon says.

Signs of better times

Gray’s top executives believe that they are back on track — and they are sending that message to the rank and file.

Following the NAB show in April, Howell and General Counsel Kevin Latek visited KOLO Reno, Nev., and KKCO Grand Junction, Colo. Considering the recent flurry of big-deal M&A, employees were skittish.

“Folks at both stations reasonably figured if the CEO and general counsel were coming, they were either getting sold, fired or both,” says Latek, who left the prominent communications law firm Dow Lohnes last year to join the Gray team. Instead, “Hilton gave a pep talk, took questions, shook everyone’s hand.”

Latek says it was a tough call to leave the law firm. But after last year’s returns came in, he got a confirmation that he’d made the right choice.

“Bob Prather gave all  employees two full paydays off” as a reward for a job well done, Latek says. “That, to me, is the kind of company I want to work for.”