Description

THESIS

Historically, Gray Television Inc. (“GTN” or “Gray”) has been a solid operator, and pound-for-pound they have the best political footprint of any broadcaster.  Over the past year, the stock has been wrecked, and their bonds along with it, for three primary reasons:

1. Overly aggressive growth/acquisition strategy (resulting in the highest leverage of any public operator)

2. Over-promising on political in 2022 (resulting in a large miss and guide-down when they reported 3Q'22 on 11/4)

3. Relatively little FCF (after growth capex) available for debt repayment in 2023, given investment in Atlanta facility (discussed below).

Their ad revenue trends have been fine.  They skew to smaller and rural markets – and this has buffered them from some of the cord cutting, which is more concentrated in larger markets.

While I find it hard to take a position in the equity, at present, the GTN credit is very attractive.  Depending on your appetite for duration (and desire for low dollar price bonds), they have several credits to choose from.  I’m going to focus on the 7% notes due 2027.  The yield is ~12% at 85 and creates the business at just over 5x (Allen and Cox bonds are closer to ~7-7.5x).

I chose this specific issue, because it has the highest coupon (a priority to refi) and expires in 2027 (right after a political cycle).  Behind the credit, there is a $650mm Pref and $800mm in common equity.  The common implies EV/EBITDA of ~7x.  It would take a 2008-esque left-tail event, to create a scenario where they have no ability to bridge past this 2027 maturity (and are instead forced to restructure around the debt).

They have been investing in a production facility (real estate) asset in their hometown of Atlanta, which has been a major cash outlay -- but that wraps up by June of this year.  Part of this will be sold to NBCUniversal, when complete.  The rest will be retained and leased out by GTN, to be used for TV/film production.  I don’t think the equity is reflecting any value for this, and it probably would have been better for the stock had they just paid down debt.  But in terms of the credit, at least it's a hard (income-producing) asset on the balance sheet.

COMPANY OVERVIEW

Gray, headquartered in Atlanta, Georgia, is the largest owner of top-rated local television stations and digital assets in the United States. The company's television stations reach ~36% of US television households across 113 markets. This includes 79 markets with the top-rated television station and 101 markets with the first and/or second highest rated television station. Gray's portfolio also includes video program production companies such as Raycom Sports, Tupelo Media Group, and PowerNation Studios, along with studio production facilities Assembly Atlanta and Third Rail Studios.

The company's revenue sources exhibit diversification across markets and network affiliations. In 2022, the largest market by revenue was Phoenix, Arizona, contributing 5% of the company's revenue. In 2021, the largest markets by revenue were Cleveland-Akron, Ohio, and Charlotte, North Carolina, each contributing approximately 4% of the company's revenue. Gray's top 10 markets contributed approximately 26% and 23% of total revenue in 2022 and 2021, respectively. In 2022, CBS-affiliated channels accounted for approximately 39%, followed by NBC (26%), FOX (14%) and ABC (11).

In each market, Gray owns and operates at least one television station broadcasting a primary channel affiliated with one of the Big Four networks (CBS, NBC, ABC, and FOX). The company also owns additional stations in some markets, some of which broadcast primary channels affiliated with one of the Big Four networks. Nearly all of the company's stations broadcast secondary digital channels that are affiliated with various networks or are independent of any network.

Currently, Gray's station portfolio reaches around 36% of total US television households. However, after applying the UHF discount, this figure drops to approximately 25% of total US television households. According to the National Television Station Ownership Rule set by the FCC, a single entity owning television stations cannot reach more than 39% of households in the United States through its commonly owned stations (this rule includes a 50% discount on the number of households attributable to UHF stations, known as the "UHF Discount").  In December 2017, the FCC issued an NPRM seeking comment on whether it should modify or eliminate the national cap, including the UHF Discount.  So practically speaking, Gray his little headroom to grow through further TV station acquisitions, unless the FCC affirms the UHF discount.  However, station “swaps” and tuck-in acquisitions are still possible.  

ACQUISITION HISTORY

Since the GFC, the TV broadcast industry has experienced substantial consolidation, driven by retransmission contract synergies and the need for greater scale (and negotiating leverage).  Gray has been active in acquiring television stations and is now one of the largest station groups, by reach.  Its largest acquisitions include:

• 2014: Gray acquired stations from Hoak Media and Excalibur Broadcasting in a deal worth $340mm. This deal added 15 stations in markets such as North Dakota, South Dakota, Louisiana, and Florida.

• 2015: The company purchased Schurz Communications' television and radio stations for $440mm, adding 13 television stations and 13 radio stations to its portfolio. The stations were located in markets such as South Dakota, Indiana, and Virginia.

• 2017: The company purchased two stations, KWQC-TV in Davenport, Iowa, and WBAY-TV in Green Bay, Wisconsin, from Nexstar Media Group for $270mm.

• 2018: Gray announced its biggest acquisition yet, purchasing Raycom Media for $3.65bn (closed in January 2019). This deal added 53 stations in 36 markets, significantly expanding Gray's footprint. 

• 2021: The company acquired Quincy Media for $92mm, adding 12 stations in seven states to its portfolio.  It also closed on its $2.8bn acquisition of Meredith Corporation's Local Media Group, adding 17 stations in 12 markets.

RISKS

Investing in TV broadcast equities/credits is more about assessing the risks than focusing on the (lack of) opportunities.  These risks have been perennially overemphasized by capital markets, which creates opportunity for opportunistic, attractive risk-adjusted returns.

• Ad trends: trends are lackluster but stable.  Auto was slow to return post covid (given low supply on lots), and improvement in that category more recently has helped to buttress weakness elsewhere.  Political keeps getting bigger every cycle, and those dollars are hitting earlier than ever in 2023. 

• Cord cutting: its ugly, and less predictable than it was pre-covid.  However, GTN is less exposed (given its small market focus) and lost linear revenue is (somewhat or completely) offset by OTT gains. 

• Macro: the business is cyclical and its leverage means outsized exposure to credit spreads.  

DISCLAIMER:  DO NOT RELY ON THE INFORMATION SET FORTH IN THIS WRITE-UP AS THE BASIS UPON WHICH YOU MAKE AN INVESTMENT DECISION - PLEASE DO YOUR OWN WORK.  THE AUTHOR AND HIS FAMILY, FRIENDS, EMPLOYER, AND/OR FUNDS IN WHICH HE IS INVESTED MAY HOLD POSITIONS IN AND/OR TRADE, FROM TIME TO TIME, ANY OF THE SECURITIES MENTIONED IN THIS WRITE-UP.  THIS WRITE-UP DOES NOT PURPORT TO BE COMPLETE ON THE TOPICS ADDRESSED, AND THE AUTHOR TAKES NO RESPONSIBILITY TO UPDATE THIS WRITE-UP IN THE FUTURE.  

Catalyst

Political cash flow (primarily in 2024)

Deleveraging through FCF