Gray: Strong Stations, Smart Operations

When Todd Schurz realized the only way he could ensure the survival of his station group was to sell it, he started looking for a potential buyer.

During a four-hour conversation with Gray Television executives in Atlanta shortly after Memorial Day 2015, Schurz sensed he’d found that buyer.

The two companies shared not only core values but operational strategies as well.

“We compete with Gray in a number of markets, we know them well,” says Schurz. “They have in our opinion a very strong group of stations. They have a number of market leaders and news leaders and really know how to operate stations in the size of communities we’re in.”

It might not have happened if Gray Television hadn’t re-invented itself in the wake of the Great Recession.

Once a penny stock, Gray has become a Wall Street darling for its disciplined acquisition strategy of buying only top stations. And despite being a small-market operator, it has also emerged as an innovator, using LPTVs and subchannels to extend its reach and multiply its Big 4 affiliations, while pioneering new technologies and bringing national sales in-house.

“We move fast, we know what we’re doing, we invest in our stations, we believe in this business and we believe we’re going to be here for a long, long time,” says Gray CEO Hilton Howell.

“I think the management team has done an excellent job,” says Dan Kurnos of The Benchmark Co. “It’s one of the most respected in the industry. Even Gray’s peers have great respect for the company. There’s a sense that these guys get it, these guys are doing it right.”

Growing Its Markets, And Revenue

The still-pending Schurz acquisition caps a $1 billion-plus, two-year growth spurt and puts an exclamation mark on Gray’s financial turnaround.

Like a slew of other station groups, Gray entered the Great Recession overleveraged. 

In the run-up to the recession, Gray paid dearly — some would say overpaid — for a couple of stations, putting it in danger of loan covenant defaults when the bottom dropped out in 2008.

That debt burden, combined with plummeting advertising revenues, left Gray skidding toward a financial crash. With shares trading as low as 16 cents in 2008, the New York Stock Exchange, where the stock had traded since 1995, threatened to delist Gray. Meanwhile, a potential loan-covenant default was growling at the door.

Many doubted that Gray could claw its way back from the edge. But claw it did, a little bit at a time, gaining traction, then momentum.

Today, Gray stock trades around $15 a share.

Once Schurz and other pending deals close, Gray will be operating 93 television stations encompassing 180 program streams in 50 markets, reaching nearly 10% of TV homes. (Grays prefers to talk in terms of program streams because its stations make heavy use of their subchannels.)

The reach is impressive, considering that its largest market, Knoxville, Tenn., ranks only 62 among the Nielsen 210.

It’s No. 1 or No. 2 in 49 of its 50 markets (pending the Schurz acquisition) and No. 1 in 40 of 50 markets.

Pro-forma 2014 net revenue was $744 million with broadcast cash flow of $340 million and free cash flow of $318 million.

An expected 80% decrease in political advertising in the third quarter of 2015 hit revenue and broadcast cash flow, up 2% and down 10%, respectively. But there were a lot of revenue year-over-year ups in the earnings report: local, 24%; national, 29%; Internet 3%; and retrans, 100%.

“We have reported better revenue growth — core growth, not make-believe growth — in our business that has surprised Wall Street,” says Kevin Latek, SVP of business affairs.

And when the political ad machine hits the throttle later this year, Gray will benefit more than most of its peers because of its targeting of key political markets.

Gray’s consistent focus on such markets is a strength that ticks up significantly in political years, says Damian Riordan of Peloton Media Advisors, a boutique financial advisory firm.

“By maintaining that focus, they have been very, very successful at exploiting — in the best sense of word — their news leadership in these markets in the political years,” he says. “They have consistently and historically over-indexed in political ad dollars, statewide and nationally, because of that focus.”

An Enthusiastic Acquirer Of Stations

Gray’s accumulation of TV stations has accelerated over the past two years. Since November 2013, including pending deals, Gray has grown from 36 to 93 program streams and from 30 to 50 markets through 20 separate deals totaling just more than $1 billion.

Among the bigger deals: Hoak Media for $335 million; SJL-affiliated stations in Michigan and Ohio, $128 million; KCRG Cedar Rapids, Iowa, $100 million; and the biggest — Schurz, for $442.5 million.

“We certainly have grown faster than I imagined,” says Latek, who joined the company as general counsel in 2012, and who has been front and center in executing the expansion strategy.

Gray had a handful of television stations, including the flagship WJHG Panama City, Fla. — named after founder James Harrison Gray — when entrepreneur J. Mack Robinson acquired it in 1993. At the same time, Robinson brought in Robert Prather and his son-in-law Hilton Howell to sit on the board.

In 2002, the management was reconstituted with Robinson as chairman-CEO, Howell as vice chairman, Prather as president-COO and Jim Ryan as SVP. Ryan had joined Gray in 1998 from Busse Broadcasting, after Gray acquired it.

Their big move into broadcasting came that same year when they bought 14 Benedek Broadcasting stations out of bankruptcy. They began spinning off Gray’s newspapers, while developing a strategy of collecting top stations in state capitals or college towns.

In 2008, Robinson stepped down as CEO and was replaced by Howell. Prather remained president-COO and, for five years, he was the public face and outspoken voice of the group. But that suddenly ended in 2013 when Prather left the company. Howell took on Prather’s president title and Latek began fronting for the company and helping with the deal making.

Such front-office shakeups can often create turmoil. “In this case the baton was passed as smoothly as an Olympic track team,” Riordan says.

Robinson died in February 2014 at age 90.

Technology Is Top Of Mind

Gray has built a reputation for being a small company with big technological ideas. Jason Effinger, SVP-media and technology, heads digital operations and oversees Gray’s version of a skunk-works test lab in Omaha, Neb.

One initiative in development there is Gray Connect, what Effinger calls Gray’s internally developed brain. The cloud-based system collects all key incoming data — news, weather, sports scores, election results — and sends it back out on command to various screens — television, computer, tablet or phone.

“The greater we can integrate these different systems into one platform for the user — the person working at a TV station — the better off are the people we serve.”

A key element of Gray Connect is that it’s proprietary technology. “Once you control the data and have an understanding of how to distribute it, you can be very nimble,” Effinger says. “We code all our own apps. It’s just code on top of code.”

Gray actually showed a decline in digital as a percentage of overall revenue in 2014, but Effinger’s not sweating that — it’s a side-effect of letting go of certain efforts that looked good in the short term but sketchy further out.

While all Gray’s stations will get new websites in 2016, a big focus will be on a mobile site.

Mobile is the future, Effinger says: “That new site is a local website built to function the way it should on mobile devices…. We can connect to viewers now anywhere, any time. I think that’s an opportunity.”

Gray was an early bettor on SyncBak. It was among the earliest to sign up with NBC’s TV Everywhere and CBS All Access. And it’s eager to work with ABC on mobile offerings, Latek says.

Gray’s implementation of cutting-edge technology — smaller, lighter, higher-resolution cameras for one-man-band reporters, as well as hybrid sets — is key to its dominance in local markets. That, in turn, makes it attractive to OTT services like CBS All Access and Roku, where it’s had a presence for more than a year.

Gray is also a big believer in ATSC 3.0, the next-gen broadcast standard. “Once the standard is set and broadcasters are able to move in that direction, it’s much more of a two-way street,” Effinger says. “It’s going to deliver better ability to connect the consumer with what’s happening and do it free over the air.”

Keeping Its Spectrum, Repping Its Own

Gray’s unlikely to be a big player in the upcoming incentive auction, Latek says. WAGT, Schurz’ NBC/CW affiliate in Augusta, Ga., likely will go into the auction. Gray also owns WRDW, the CBS affiliate in Augusta. Gray intends to consolidate WAGT with WRDW. The NBC affiliation will go to Gray’s Class A WAGT-CA in Augusta.

Even if other Gray stations were in high-demand markets, “We’re the No. 1 station,” Latek says. In other words, the spectrum is more valuable for Gray to own than sell.

That said, “It might be worth it to move from UHF to VHF if the price is right,” he adds.

While Gray’s performance has generated mostly good reviews, its decision to go in-house for rep duties prompted skepticism. The issue: Is going it alone more cost-efficient? Gray expects to save $8 million to $9 million in 2016 taking the work in-house. It recorded a $6.1 million non-cash charge in 2015’s third quarter for termination fees to Katz and CoxReps.

“We spent about a year evaluating options,” Latek says. “The most important factor to us was that we had about 25% of stations already dealing directly with national [media] agencies.

“We found that stations dealing directly with agencies were doing just as well as those with rep firms,” Latek says.

As of Jan. 1, all but one Gray station shifted to dealing directly with national advertising agencies.

Making The Most Of Multicasting

Howell and Latek are predictably bullish on the future of broadcasting. The network-affiliate relationship is a key component of their optimism.

“I will tell you that despite some publicity out there, I think the local affiliate relationship with the network is one of the best business partnerships ever created,” Howell says. “There is no way that national distribution in a country the size of the United States will ever be able to replace what local stations bring.”

Gray was quick to take advantage of the multicasting capability of the new digital broadcast standard as it was phased in during the 2000s.

Much of Gray’s subchannel lineup encompasses smaller networks — CW, My Network TV, MeTV, Telemundo, Antenna TV, This TV among them. But the digital tier also includes Big 4 affiliates — three CBS, three Fox and two ABC.

“The value there is obvious,” says Latek. Gray provides the big networks with a local affiliate rather than an out-of-market one. Viewers prefer that, he says, which means advertisers do, too.

There’s another advantage.

When FCC regulations require Gray to sell a station with a major affiliation  to comply with local ownership limits, Gray shifts the affiliation to a digital subchannel of its other station in the market, thus maintaining the relationship, and the revenues — particularly retrans — that accompany it.

Gray has spun off several stations to minority and women investors — the FCC encourages such deals — while maintaining Big 4 affiliations.

Gray has little appetite for home-grown programming outside of news and sports for a simple reason, Latek says: “It takes a lot of money to produce a good show and we don’t have as much money as the other guys.”

Latek’s 15 years at the communications law firm Dow Lohnes in Washington gives him particular insight into both the business and regulatory environments. The FCC’s Wheeler administration has given nearly everyone something to complain about, but Latek says regulation isn’t a hot button for Gray at the moment.

“I don’t see the regulatory environment as having a big impact on Gray,” he says. “We have no JSAs, SSAs or LMAs and we’re nowhere near the ownership cap.”

Nor is he particularly perturbed by the retrans reform efforts MVPDs are pushing.

“I’ve been doing retrans since 1997 for scores of broadcasters,” he says. “I can’t remember a year when MVPDs weren’t trying to change the law to get better leverage over broadcasters when, ironically, the vast majority of fees they collect are from the non-broadcast side. This year is no different from any other year.

“Retrans is a tremendous source of revenue for us, for the industry and for networks,” he says, adding that those revenues should continue to grow until there’s some level of comparability with what cable program providers receive.

Will Gray continue to add to its station portfolio? That gets a resounding yes from Howell and Latek, with the proviso that the deals are accretive and sync with Gray’s market focus and financial discipline.

However, a shortage of properties that fit Gray’s buy profile may dial down deal volume.

“I would say the pipeline over the medium term is far more than we can afford,” Latek said during the company’s second quarter results conference call. “We’re going to be prudent with multiples, prudent with leverage.”

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.”

Taking a breather on deals is a chance to use free cash flow to pay down debt. Today, Gray’s 4.9 times debt-to-cash flow ratio is a little above where the company would like, and that will ratchet up to about 5.5 times after the Schurz deal closes. But, as Latek points out, that’s still consistent with peer group companies such as Nexstar.

Meanwhile, it’s all about the basics.

“I think we now have an incredibly efficient company,” Latek says. “Our stations run faster, smoother and more efficiently than most broadcast stations precisely because we had a brush with death.”

And while Howell acknowledges the challenges that other legacy media like newspapers and radio face, he has no doubts about broadcasting’s future.

“I don’t know any other advertising medium that succeeds as well as television. Everything that sells on digital, if it’s just on digital, it’s going to die. If you put it on television, it’s going to succeed.

“The business has been going extinct since I was alive, but yet it’s still here. We’re doing great and I think we’re entering into a new Golden Age of broadcast.”

This story originally appeared in TVNewsCheck’s Executive Outlook, a print publication devoted to the future of broadcasting. Subscribe here. Read the other stories in the Winter 2016 issue here.