Gray Bullish On M&A, ATSC 3.0, Spectrum

Countering the notion that broadcast station trading is stalled, Gray Television executives hinted at imminent deals during this morning’s fourth-quarter 2014 earnings conference call with analysts.

While acknowledging that retrans/reverse compensation, the FCC spectrum auction and other factors have created a climate of uncertainty surrounding M&A, Gray boss Hilton Howell Jr. said his company is hot on the trail of deals.

“We don’t think that it in any way inhibits [M&A] in markets we focus on,” said Howell, Gray’s president-CEO. “We are fully engaged in the M&A process and we think we’ll have something to tell you soon.”

Like a number of other station groups, Gray has been on an acquisition streak over the past couple of years. In the process, the company has pushed its leverage ratio to 6X times cash flow, or about $1.23 billion in debt. That makes it one of the more highly leveraged station groups.

Jim Ryan, Gray CFO, said the company intends to strike the right balance between buying and borrowing.

“We’re still wanting … desiring to be acquisitive,” Ryan said, “but we’re going to be mindful of leverage as we do that. We’re comfortable with the glide slope we’re on,” regarding leverage, he said.

Gray’s unlikely to offer up spectrum in the upcoming FCC incentive auction as a vehicle to generate cash, either to pay down debt or make acquisitions, executives said.

“We don’t see many or any opportunities for Gray to surrender spectrum,” said Kevin Latek, SVP-business affairs.

Howell said Gray is a strong supporter of the next-generation broadcast standard dubbed ATSC 3.0 and considers it an attractive revenue producing opportunity. The Greenhill & Co. reports on potential spectrum values have generated a buzz among station groups, prompting many to reconsider participating in the auction.

But, with Sinclair’s David Smith leading the charge, many are also looking at the potential long-term revenue streams that could be enabled by ATSC 3.0.

Gray’s stations typically are in mid-size to smaller markets where there is less demand from wireless broadband providers to acquire spectrum. Moreover, Latek noted, with Gray’s stations ranking No. 1 or 2 in their markets, there’s likely more value for Gray in retaining the spectrum.

“Everyone says their children are above average,” Latek said. “Gray can demonstrate ours actually are. Gray does not think that scale for us means we have to [cover] 30%-40% of the U.S. We think scale for us means vertical integration.”

Gray does see opportunities to capitalize on the auction by obtaining programming, talent and other assets from stations that do go away, Latek said.

Addressing Gray’s announcement this morning that it had become the first non-O&O group to strike a deal with NBC on TV Everywhere, Latek termed the agreement as “frankly, a technical document” that details how Gray and the network will interact.

Latek said he expects the NBC TV Everywhere agreement to be revenue and expense neutral.

“We consider it an investment where the payoff may be … down the road,” he said.