With company stock trading at a lower cash-flow multiple than TV stations, the Gray COO says that the company would rather buy back its own stock than more stations.
Gray Television President/COO Robert Prather says it make more sense to buy back the company stock than it does to purchase more TV stations.
With TV stations selling at 12 or 13 times cash flow, Gray’s stock is a relative bargain, he told investors at the Credit Suisse Media and Telecom Conference in New York today. “It’s just so cheap now, it’s hard to resist.”
Gray stock (GTN) is currently trading at around $6.32, down from its 52-week high of $10.36.
But Prather said that the company would be using most of its free cash flow to pay down debt that it incurred over the past year with the purchase of two TV stations—WNDU South Bend, Ind. (DMA 87) and WSWG Albany, Ga. (DMA 147).
Gray is a “discipline acquirer,” Prather said. It buys stations every two or three years and uses the time in between the buys to pay down debt, he said.
Prather said he was pleased wit the recent purchases.
When Gray purchased WNDU from the University of Notre Dame, Prather said, it was a “very poor performer” with a 26% cash-flow margin and too many employees.
In its first year under Gray management, the staff has been cut from 120 to 88, local revenue has risen 14% and the margin has swelled to 42%, he said.
The company can push the margin to more than 45%, Prather said. “This is a real gem that has a lot of upside.”
WSWG was “basically broke” when Gray bought it, Prather said. Gray has begun turning it around by acquiring a CBS affiliation (it had been UPN). The station is now “cash flow positive” and is preparing to offer local news next year, he said.
Gray is already making good use of its digital multicasting channels as affiliates of CW, MNT and even Fox.
Prather said that he anticipates that every Gray stations will eventually offer three or four digital channels, including one that may offer video-on-demand services. “We have the spectrum available,” he said. “We have to figure out how to make it work.”
The Web has produced a significant new revenue stream, Prather said. This year, station Web sites will generate $9 million in revenue with a 65% operating margin. “We are budgeting to doubt…[the revenue] next year,” he said.
Prather was not nearly as bullish on retransmission consent revenue from cable operators, noting that most of its deals come up for renewal in 2008. He said that Gray’s plan is to follow the lead of CBS, which has been insisting that it will settle for nothing less than cash in its next round of retrans deals.
“Our hope is that CBS is going to stand tall and fight these guys,” Prather said. “I think until CBS is willing to break the barrier, these big [cable] guys are not going to pay anything.”