Gray Looks To Grow After 4% 3Q Core Drop

The off-year political revenue woes experienced by all broadcast television groups were exacerbated at Gray Television by the loss of Olympics revenue at its strong set of NBC affiliates, Gray execs told securities analysts during its 3Q financial results conference call. But the return of both bodes well for 2018, along with a potentially rejuvenated M&A market.

Despite the red ink, Gray came in at the high end of guidance for the quarter, according to President-CEO Hilton Howell Jr., who credited better-than-expected political income. Nonetheless, on a pro forma basis, its core advertising was down 4% to $110 million.

Gray’s heavy exposure to NBC was responsible — no Olympics, no $8.2 million, noted EVP-CFO James Ryan, attributing $6 million of that figure to local advertising and the remaining $2.2 million to national. He said that excluding its stable of NBC stations, core was actually up 3%.

The total pro forma local core hit was $4.8 million, a loss of 4%, and the political hit amounted to $24.2 million. These setbacks were mitigated by a 1% gain to $900,000 in national and a $13.2 million (23%) gain in retrans revenue.

Looking ahead, Howell noted that the NBC exposure that hurt comps in 3Q will roar back into favorability, with Gray expecting to reap the benefits of both the Super Bowl and the Winter Olympics early next year.

And of course, political will be back. Kevin Latek, EVP and chief legal and development officer, noted that in addition to the normal general election windfall, Gray is expecting a particularly volatile political climate to result in a higher-than-normal number of seriously contested primary battles and the double-dose of political income they create.

Latek touted the company’s battleground exposure, noting that 65% of its markets will benefit from a U.S. Senate race, 81% from a gubernatorial race, and 100% from at least one U.S. House race.

Core is pacing up low single digits, Ryan said. Except for communications and auto, all categories are pacing in the black.

Ryan said auto is pacing down about 1.5%, but has been improving, and the company is optimistic that the year-end holiday season will bring in additional business in the category.

Adding some color, Ryan said: “It’s not wholesale dropping out, it’s the little guy taking a little bit off the table, and so it’s a lot of small dollars that just add up to a little bit of softness.”

Latek said that during the fourth quarter the group will be renegotiating retransmission consent agreements covering 58% of its stations. He noted that the negotiations process is easing. “It is clear,” he said, “that we no longer need to explain how broadcasters — and our stations in particular  deliver the most value to pay TV operators and deserve to be compensated accordingly.”

Latek explained that although the impact of cord-cutting and OTT may have arrived in larger markets, it is just starting to make it down to the zone where Gray operates most of its stations. Thus far the effect on subscribers has been “infinitesimal,” he said. Howell added that Gray was currently “agnostic” as to what platform a subscriber is using.

Overall, Gray’s retrans sub totals are down slightly, said Latek, but not enough to be of any concern.

Regarding the FCC’s dereg proposals, Howell said: “It’s simply incredible that the FCC imposed the one-to-a-market rule that still governs mid-size and small television markets before the bombing of Pearl Harbor.”

He added: “We are grateful that the FCC finally will begin to take some long-overdue steps to permit local stations to take steps necessary to be competitive in the world in which we live.”

Howell also praised positive movement toward the new ATSC 3.0 standard.

Asked if the company’s M&A strategy would focus on in-market or footprint expansion, Howell noted that the company is already heavily duopolized, with an average of 3.9 program streams per market. He said: “We’re going to continue to look at other transactions to grow a broader scale throughout the United States.”

“Things have been relatively slow on the M&A front,” elaborated Howell. “We expect things to pick up rapidly after the FCC comes to a final conclusion on their rules, and it is our intention to take advantage of that whenever we have an appropriate and a financially appropriate opportunity to do so.”

He said Gray is interested in “dramatically” increasing the company’s scale and coverage.

Latek added that notwithstanding Howell’s talk of territorial expansion, the company is patient and will look at any deal on its own merits, whether it’s adding another in-market station or expanding into another market.

Howell further noted that while the Gray is open to moving into larger markets, it’s preference for buying No. 1 or strong No. 2 stations generally precludes such a move, since such stations rarely come on the market and when they do, the price has generally been more than Gray wanted to pay.

Meanwhile, there are “scores of stations” that are in Gray’s wheelhouse in markets 100 or smaller.

Ryan pegged the company’s current leverage at 4.99x, adding that it expects to knock it down a few pegs by years end, to the high 4s. And if all goes as expected, Gray’s leverage will be in the 3s by the end of 2018.

Gray took at least one step that increases its forward visibility when it comes to reverse compensation expense. Under terms of a recently signed deal, it has renewed all of its CBS stations through 2021. All stations were included, regardless of when their contracts had been set to expire.