Gray’s Immediate Goal: Reducing Its Debt

The TV group’s management says eventually it will look to add stations, but for now it's focusing on dealing with its roughly $830 million in debt and lowering its debt to cash flow ratio.

Forget the art of the deal, at least for now. It’s the art of debt reduction that’s Gray Television’s focus for the foreseeable future.

“We at Gray believe the broadcast business needs to consolidate and we in time will be one of those consolidators, but we are focused on decreasing debt and improving our balance sheet,” said Hilton Howell Jr., Gray CEO and vice chairman, during the company’s second-quarter financial results conference call today.

James Ryan, senior vice president-CFO, noted that Gray’s still shouldering significant debt — roughly $830 million at the end of the quarter. One key measure is first-lien debt — read bank debt — which at Gray stood at about 4.2 times versus a covenant of 6.75 times.

Although the company has the ability to borrow more money under that covenant, Robert Prather, Gray president-COO, said it likely will be a couple of years before the group would move into the acquisitive mode.

“Our No. l focus this year and next year is paying down debt,” Prather said. “We want to get our debt to cash flow ratio down to where rest of industry is.”

After several years of concerted effort, a number of the pure-play, publicly traded station groups have brought overall debt to cash flow ratios down to 4-5 times. Gray’s overall ratio is around 7 times.


For the time being at least, any expansion of the station group is effectively moot. While broadcast M&A appears to be gathering momentum — with Freedom, Young, McGraw-Hill and, most recently, Nexstar putting up for-sale signs — Prather noted that Young reportedly has withdrawn its offer, Freedom is “on hold” and McGraw-Hill “does not fit our profile.”

McGraw-Hill’s stations are mostly in larger markets while Gray focuses on small to mid-size markets.

Plummeting financial markets, although clearly linked to Standard & Poor’s downgrading of U.S. debt from AAA to AA+, don’t bode well for M&A, either.

Despite that, Gray remains cautiously optimistic about third-quarter performance. That’s based in part on signs that Japanese automakers are recovering from the devastating earthquake and tsunami earlier this year.

In addition, Gray executives observed that Internet and retrans revenues continue to grow and Ryan said that if third-quarter political revenues come in around the high end of expectations — about $3.9 million — 2011 could eclipse 2009 as a record off-year for political at the group. Gray brought in $16 million in political revenues that year.

Retransmission fees and network compensation continue to be a strong focus at Gray, Prather said. After completing affiliation agreements with Fox on four digital subchannels in small markets earlier this year, the company has a breathing spell before the next round of talks — with NBC — begin this fall.

Most of Gray’s retrans contracts expire in the next several years and Prather said he hopes to strike a balance between deals negotiated with cable companies and, on the flip side, those negotiated with networks.

“Our goal is to keep what we’ve got now and add into it,” he said. “I think we made a reasonable deal with Fox.… The good news for us is we’ve got two more years of ABC and three more years of CBS before we have to start talking to them.”

He said it appears that NBC “probably is not ready to do joint negotiating until late in 2012.

“We’re willing to listen to anything,” he said. “It will be interesting to see what kind of proposal they come up with.”

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