Gray Buying Two Nexstar Spinoffs For $270M

Gray Television is spending $270 million to boost its station portfolio, buying two stations that Nexstar Broadcasting Group is divesting to make way for its pending merger with Media General.

Gray is acquiring WBAY (ABC), in Green Bay, Wis. (DMA 68), and KWQC (NBC) Davenport, Iowa (DMA 101), both currently owned and operated by Media General.

The addition of these two mid-market stations, Gray said, will be immediately free cash flow accretive while also allowing Gray to further deleverage its balance sheet. Gray will acquire WBAY and KWQC concurrently with the closing of the Nexstar/Media General merger, which the parties anticipate will occur in the fourth quarter of 2016.

According to Nielsen and BIA data, WBAY is the highest rated and top-grossing television station in the Green Bay DMA. Gray noted that in Wisconsin and the Upper Peninsula of Michigan, Gray owns the top-grossing stations serving Madison (WMTV/NBC), Eau Claire-Lacrosse (WEAU/NBC), Wausau-Rhinelander (WSAW/CBS and WZAW/Fox), and Marquette, Michigan (WLUC/NBC/FOX).

Likewise, Gray said, Nielsen and BIA data identify KWQC as the highest rated and top-grossing television station in the Davenport-Rock IslandMoline DMA (also known as the Quad Cities DMA).

KWQC, which has been the top-rated television station in its market for over 35 years, will be Gray’s third television station serving Iowa, joining WOWT (NBC) in Omaha and KCRG (ABC) in Cedar Rapids. The Davenport station and Gray’s Rockford station (WIFR/CBS) cover all of northwestern Illinois.

“We are thrilled to be selected as the new owners of WBAY and KWQC,” said Hilton H. Howell, Jr., Gray’s chairman-CEO. “Gray came to admire these stations many years ago when we provided management consulting services to their former owner, Young Broadcasting, prior to its merger with Media General. The potential regional synergies between these two legacy institutions and our existing stations in Wisconsin and Illinois appear to be even more promising now that we have recently acquired the dominant television stations in the adjacent television markets of Cedar Rapids and Marquette. We are also delighted to add two strong market leading stations in the historically strong political revenue states of Iowa and Wisconsin.”

Gray said that including expected operational synergies, the stations are expected to produce two-year blended broadcast cash flow margins greater than 50%. In addition, the acquisition will be immediately free cash flow accretive to Gray as well as allowing Gray to continue to de-lever to historic lows.

The transaction has been structured to deliver significant tax savings to Gray, including a step-up in the tax basis of the acquired assets. Including expected operational synergies, the transaction represents an attractive purchase price multiple of approximately 8.0 times blended 2015- 2016 pro forma broadcast cash flow.

Gray said the multi-year tax advantages to Gray “further reduces our purchase multiple. The weighted average purchase price multiple of the WBAY/KWQC acquisition, the Schurz acquisition and related transactions consummated earlier this year, and the pending Clarksburg acquisition approximates 7.3 times the blended average of the 2015-2016 pro forma broadcast cash flow of the television stations covered by those transactions.”

Gray said it has the capacity to close the transaction primarily through the use of cash on hand at closing and, if then necessary, availability under its existing senior credit facilities.

In addition, Gray said it may also consider opportunistically accessing the debt markets. Expected strong free cash flow generation through the closing of the transaction and throughout 2016 should continue Gray’s recent success in achieving considerable de-levering of its capital structure.

Assuming a year-end closing of this transaction; no further acquisitions; no capital returns to shareholders; no receipt of FCC spectrum auction proceeds; and no increase in pro forma 2016 political advertising revenue over that of pro forma 2012, we anticipate ending 2016 with a historically low total leverage ratio, net of cash, in the range of 4.5 to 4.7 times on a trailing eight-quarter basis.

Cooley LLP served as legal counsel for Gray.