Gray Sees Young Stations As Possible Buy

Gray Television’s financial performance reached record levels in three key categories last year: annual revenues, fourth-quarter revenues and political revenues.

What’s the follow-up in a non-political year? Manage expectations, continue paying down debt and improve on what you’ve built.

“Quite simply, it was a blowout quarter, a quarter for the record books,” said Hilton Howell, Gray’s CEO and vice chairman. “It portends extremely well for Gray in the next political cycle in 2012.

“We see 2011 as typically an off-year in the broadcast cycle.”

Projecting first-quarter 2011 performance, Gray expects local revenues to be flat compared to the same period last year. National revenues are likely to decline roughly 8%, in part because lower Super Bowl revenues and the lack of Olympics.

The decline in national ad revenues may be somewhat offset by anticipated increases in Internet and retrans revenues.

There may be a slight upside surprise in political. The company’s official report projected about $500,000 in political revenues. Advertising revenues associated with the Wisconsin union dustup may have already surpassed that.

“We’ve gotten over $500,000 in the last 10 days from our Wisconsin stations, mostly from the unions,” said Robert Prather, Gray president-COO, in response to a question during Tuesday morning’s conference call. “We’ve been very fortunate to bring in some pretty good dollars .… The longer it goes on, both sides are spending more money. It’s been real nice for us so far.”

Net operating losses of $272 million will help Gray with its tax bills for some time to come. Meanwhile, the company remains keenly focused on paying down debt.

Jim Ryan, SVP-CFO, said Gray used free cash flow in 2010 to pay down $50.2 million in debt, pushing its first-lien coverage ratio down to 4.46 times, compared to a covenant of 7 times.

Nonetheless, Gray’s long-term debt increased about 4.4% in 2010 to $826.7 million, according to the company’s earnings report.

“We won’t have the same free cash flow (in 2011), but we will try to use every penny we can (to pay down debt),” Prather noted in response to a question. “We hope to pay down $50 million-plus in 2012. “We’re focused on debt. We want to pay down as much as we can as quickly as we can.”

One key reason: Gray wants to be prepared when the seven Young stations it’s managing go on the market. “If it’s possible to acquire them at a reasonable price without increasing leverage, that’s something we’d be interested in,” Prather said. “If the (Young) ownership group decides to sell in 2012, we’d take a hard look at that point.

“We don’t have anything in writing, but we’d be the logical person to look at it. They have told us they’re not long-term owners.”

Prather noted, however, that with the M&A market still waiting for a deal to set a cash-flow multiple benchmark for transactions, valuing the Young properties remains problematic.

A transaction for Freedom Broadcasting would help provide clarity, Prather said:

“I think the key is what happens there. Until there’s some indication of a benchmark set on multiples, I think the private equity guys and (station) groups are kind of on the sidelines.”