Gray Interested In Continued TV Expansion

Gray Television’s growth spurt, fueled most recently by its $442.5 million acquisition of Schurz’s TV and radio stations, may have to hit the pause button as the Atlanta-based station group digests recent deals.

But at only about 9.3% coverage, Gray still has plenty of room to grow.

“We will continue to look for acquisitions that add to what we’re doing,” said Gray CEO Hilton Howell during Tuesday morning’s conference call to brief analysts on the Schurz deal. “We have a strong wish list. There are many stations in many smaller station groups that are perfect for our geographic cluster. We still have a long road ahead in that regard.”

Added Kevin Latek, senior vice president-business affairs: “I would say the pipeline over the medium term is far more than we can afford. We’re going to be prudent with multiples, prudent with leverage.”

Gray’s largest market is Knoxville, DMA 62. Latek said that Gray is interested in “markets in the 30s, 40s and 50s,” but said that the opportunities there are limited. The stations in those markets that meet Gray criterion — those with No. 1 or No. 2 rankings — belong to groups that are not sellers.

In any event, he said, “it’s not likely we’ll go into New York.”

While Gray officials declined to give specifics on synergies from the Schurz deal, Latek said to expect “retrans uplift” as Gray’s more lucrative retransmission consent contracts with MVPDs go into effect at the Schurz stations. “We think part of the logic of the transaction is to bring those stations up to our numbers.”

At the same time, said Latek, the Schurz affiliation agreements with the networks are not up for renewal in the “near term,” which means no increases in reverse comp are in the offing.

In addition to retrans, synergies will flow from deal-making with hardware and program vendors and from the plan to combine and streamline operations in Rapid City, S.D., and Augusta, Ga., CFO Jim Ryan said, calling those situations “the equivalent of in-market duopoly plays.”

The Schurz deal grows Gray’s portfolio to 49 markets in 28 states. That count includes 39 No. 1 stations, and 48 out of 49 stations, post-Schurz closing, that are No. 1 or No. 2, according to Gray.

Here’s how the deal looks by the numbers:

Gray is paying $442.5 million for the Schurz broadcast assets, which also include radio stations in three markets. The TV assets encompass nine stations (along with seven satellites) in seven markets.

The broadcast cash flow multiple for the deal is 7.1 x buyer multiple. Gray officials declined to provide a seller multiple for the deal during Tuesday’s conference call.

On a “pro forma” basis (including the financial results of all Schurz stations plus the financial results of all transactions previously completed and/or announced by Gray as if they had been completed on Jan. 1, 2014, including anticipated synergies):

• Gray’s 2014 total net revenue would have increased to approximately $774 million.

• Net political revenue would have increased to approximately $120 million, which equals $11.40 per pro forma television household in Gray’s 49 television markets.

•  2014 broadcast cash flow would have increased to approximately $348 million.

• The deal bumps Gray’s debt-to-cash flow leverage ratio up to 5.5x.

Following is a breakdown of the assets:

• Wichita, Kan. (DMA 65): Schurz owns KWCH and three satellite stations that serve as the market’s CBS affiliate. KWCH is the top-ranked and highest grossing station in the market. Schurz also owns KSCW, the CW affiliate, and it provides sales and other services to Entravision’s KDCU, the market’s Univision affiliate. Gray already owns KAKE and two satellite stations, which serve as the Wichita market’s ABC affiliates. To facilitate regulatory approval, and prior to the Gray-Schurz closing, Gray will sell KAKE. After such sale, KAKE will be owned and operated completely independently from Gray.

• Roanoke-Lynchburg, Va. (DMA 69): Schurz owns WDBJ-TV, the market’s CBS affiliate, and the number-one ranked and highest grossing station in the market. Through the acquisition of WDBJ-TV, the transaction will add a third Virginia market to Gray’s portfolio.

• Springfield, Mo. (DMA 75): Schurz owns KYTV, the market’s NBC affiliate, and KCZ, the market’s CW affiliate. KYTV is the number-one ranked and highest grossing station in the market. Schurz provides sales and other services to duopoly partner Perkin Media’s KSPR, the market’s ABC affiliate. Springfield will be Gray’s first television market in Missouri.

• South Bend, Ind. (DMA 96): Schurz owns WSBT, the market’s CBS affiliate and the number-one ranked and highest grossing station in the market. Because Gray also owns NBC affiliate WNDU South Bend, Gray will spin off WSBT. After the closing, WSBT will be owned and operated completely independently from Gray and WNDU.

• Augusta, Ga. (DMA 112): Schurz owns WAGT, the market’s NBC and CW affiliate. Gray owns WRDW, the market’s CBS affiliate. Over time, Gray expects to consolidate WAGT’s operations with Gray’s existing operations in this market. Gray anticipates that the FCC license for WAGT will be offered in the upcoming FCC spectrum auction, with the proceeds from such auction, if any, payable to Gray.

• Anchorage, Alaska (DMA 148): Schurz owns KTUU, the market’s NBC affiliate. KTUU is the No. 1 ranked and highest grossing station in the market — as well as the most-watched and highest grossing station in the state of Alaska. It will become Gray’s first television station in Alaska.

• Rapid City, S.D. (171), Schurz owns KOTA and three satellite stations, which serve as the market’s ABC affiliate. KOTA is the No. 1 ranked and highest grossing station in the market. Gray anticipates combining KOTA’s with those of Gray’s KEVN, the market’s FOX affiliate.

Radio Stations: Schurz owns the top-ranked group of radio stations in South Bend, Ind.; Lafayette, Ind.; and Rapid City, S.D. Like Schurz, Gray owns television stations in two of these three markets. The radio stations would have contributed less than 1%p of Gray’s total broadcast cash flow in 2014 on a pro forma basis (as defined above).

In the conference call, Gray said it would prefer to swap KAKE Wichita and WSBT in South Bend for similar stations in other markets rather than simply sell them.

Investor enthusiasm for the Gray-Schurz deal stands in marked contrast to the reaction the Media General-Meredith deal provoked. Media General shares dropped more than 6% when that deal was announced last week.

While it’s not unusual for the acquiring company’s shares to decline, Media General’s share drop was a bit bigger than typical as investors question what the company intends to do with Meredith’s publishing arm and what’s happening with the management shuffle.

Meredith shares, which rose nearly 10% when the deal was announced, have given back some of those gains.

Conversely, Gray’s share price rose on news of the Schurz deal and was up more than 10% in early afternoon trading today.