GRAY TELEVISION INC GTN
August 03, 2018 - 11:57am EST by
goob392
2018 2019
Price: 15.00 EPS 0 0
Shares Out. (in M): 102 P/E 0 0
Market Cap (in $M): 1,500 P/FCF 0 0
Net Debt (in $M): 3,750 EBIT 0 0
TEV (in $M): 5,250 TEV/EBIT 0 0

Sign up for free guest access to view investment idea with a 45 days delay.

  • winner

Description

Gray Television GTN ($14.90)
Long Thesis
GTN has announced a highly cash flow accretive merger with a smaller competitor, which should result
in a very high quality station portfolio, a reasonably leveraged balance sheet and substantial free cash
flow (>$3 /share). I believe the combined entity is substantially undervalued at the current price of $15.
I do not dismiss the current crosswinds (and headwinds) in the media space but believe these issues will
prove manageable over time and are overly discounted at the current valuation. While not required for
GTN to reward investors, I do expect national coverage caps to be raised. The caps were enacted in the
pre- GOOGL, FB media landscape and actually reduce competition versus those companies and others.
The Deal:
 
On June 25, GTN announced an agreement to acquire Raycom Media for $3.55 billion, consisting of
$2.85 billion in cash, $650 million in a new series of preferred stock, and 11.5 million shares of GTN
stock. Including synergies and after divestitures, the purchase price represents a 7.5x multiple of
Raycom’s anticipated 2018/2019 operating cash flow. The combination would make Gray the third
largest broadcast portfolio in the country with 142 stations in 92 markets and a 24% US household
footprint. The acquisition expends GTN reach and maintains station quality (62 stations w/ # 1 Nielsen
ratings and 92% of markets with the #1 or the #2 Nielsen rated local television station). Closing expected
in 4Q18.
 
There is a good merger presentation on the GTN IR site. https://gray.tv/index.php?page=presentations
 
 
I will summarize key points below:
 
Increases scale: HH reach now 24% (18% w/ UHF discount)
Now #4 in reach (SBGI, NXST, TGNA)
Now #3 in EBITDA (SBGI, NXST)
Immediately Accretive to FCFPS. +60% on fully taxed basis.
Divesting 9 overlap markets. Clean deal no Sinclair issues
Buyer’s Multiple 7.8X, incl $150M NOL PV
Synergies: $80M in year 1.
Pro Forma Leverage 5.0X
Q4 2018 close, well below caps, disposing all 9 overlaps.
 
 
Post deal the new GTN should generate $750-$775M avg EBITDA for the ‘18/’19 cycle and as much as
$800M avg over the ‘19/’20 cycle as retrans kicks in.
 
Free Cash Flow including utilization of the Raycom NOLs should be in the mid/high $300M range.
Excluding the NOL FCF should comfortably exceed $3/ share in the ‘19/’20 cycle.
 
Longer term ASC 3.0 represents an interesting opportunity for GTN (and SBGI, NXST and others).
 
 
GTN is still relatively small ($1.5B mkt cap) and some investors were probably expecting the company to
be a seller not a buyer. In addition, the company’s pro forma analysis was based off of historical ‘16/’17
cycle results. 2016 was an unusual election year from an ad spend perspective. Something tells me
media spend will be up, not down in 2020.
 
Retrans revs are around $600M for the combined company and the $80M synergy target includes a
contractual $15M step up to get Raycom onto GTN’s retrains rates. The larger company should be
better able to push retrains and manage reverse retrans exposure. The combined company should be
well position as the next cycle of retrans step–ups kick in in the ‘19/’20 cycle.
 
I expect retrains ramp will more than offset flat/modestly declining ad revs over the next few cycles.
GTN and Raycom are significantly exposed to the local ad market. This exposure bears watching over
time as a significant risk to my favorable view of GTN (and NXST).
 
OTT is another overhang to all traditional media companies. Given the strength of GTN’s stations in
their local markets, they have signed distribution agreements with almost all of the meaningful OTT
players. (this is true for NXST as well). Management teams indicate they are happy with the margins on
the OOT revenue.
 
Capex should be around $80M for the combined company and free cash flow should delever
debt/ebitda to the mid 4s by 2019 and 3+ by 2020.
 
Note Raycom also has some other assets which could generate additional growth asset value over time.
Raycom also still has a meaningful spectrum position. I am trying to track down specific numbers on this
asset.
 
 
Given the Sinclair fiasco I’ve included management’s comments on the GTN-Raycom deal closing risk
below. In summary, I think it is highly likely that this deal closes.
 
 
This transaction does not seek any waivers of SEC ownership rules, period. We have overlaps in
9 markets. While we believe we could obtain approvals from the government to keep some of
those and create new duopolies, we have decided and decided very early on with Raycom that
we would instead move immediately to divest an overlap station in each overlap market. Wells
Fargo is beginning -- as Hilton said on his remarks, they're beginning already this morning to
reach out to potential buyers. We will have an expedited process. You may recall with Schurz,
we started and finished the divesture process in 30 days. We are targeting a pretty aggressive
period here. We expect to be at the government in middle of August with divestures lined up,
and again, we are not seeking any waivers. On the national ownership cap, we mentioned that
the company combined today would reach 24% of the U.S. That is without the UHF discount,
with the discount we will be even lower. So let's assume there's no UHF discount, this
transaction complies with every version of the SEC's cap on a national audience reach going
back to 1985. Back then the cap was 25%. There were 3 television network in an analog world
when Facebook's Mark Zuckerberg celebrated his first birthday. So we think this is the cleanest
possible transaction that we could present to the SEC and DOJ, and we're doing that on purpose.
 
So I would say -- we said fourth quarter without wiggle room in the press release because we
feel very comfortable and confident we'll be able to achieve what we need from not just the
government, but our other major partners like the networks to move forward. I think, both of
our companies really present a compelling transaction for our network partners as well. So we
do think this is going to be a quick path to closing this year”
 
 
 
Company Summary:
Financials:
 
$15 * 102M shares = $1.53B Mkt Cap + $3.75BM debt+ $650M pref = $5.93B TEV
Revs: $2.0B run rate post divestitures.
EBITDA: $750-$775M for ‘18/’19 and $800M for ‘19/’20.
Free Cash Flow: mid/high $300M range for ‘18/’19 $3.50+, $3.25 ex NOL benefit
 
 
 
Current Target
 
    
Price $15.00 $20.61
 
Shares 102 102
 
Mkt Cap 1530 2103
 
Debt  3750 3750
 
Pref  650 650
 
TEV 5930 6503
 
 
 
18/'19
 
EBITDA 765 765
 
EBITDA mult  7.75 8.5 Target
  
FCF $3.30 $3.30
 
FCF yld 22% 16%
 
 
Catalysts:
Raycom deal closes.
Regulatory clouds lift.
Ad business not as bad as feared.
Digital, retrains, etc continue to grow.
Caps lifted, another round of consolidation.
 
 

 

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

Raycom deal closes

Regulatory clouds lift

Ad Business not as bad as feared

Digital, Retrans continue to grow.

Caps lifted, another round of consolidation, big tech companies enter media space directly.

Sinclair stops shooting themselves and everyone else in the foot/head.

    show   sort by    
      Back to top