Description

Gray Television – GTN ($17.50)

I am recommending GTN again. While the original post (8/7/18 at $15) rated poorly, the stock rose 60% over the subsequent 8 months peaking at $25 in early April. See Exit Rec 4/16/19. The key factors supporting that recommendation remain in place and yet GTN has retraced almost the entire move and has recently lagged behind peers NXST and SBGI creating a valuation anomaly and a compelling investment opportunity.  I have repurchased my entire position and then some.

GTN offers Respected, Conservative Management running High Quality TV Station Assets having integrated a Massively Accretive Deal and about to experience a Record Boom in Political Advertising. 

The highly accretive merger with Raycom closed 1/2/19 and all signs are that synergies targets are on track if not ahead of initial guidance. In recent presentations management has been pointing to additional synergies beyond the year 1 synergies previously discussed.  All $80M of synergies discussed at the time of the merger announcement were Year 1 synergies and have already been implemented.  (As an aside, how many management teams include only year 1 synergies when discussing a big merger and the resulting accretion?). The Raycom deal doubled the size/scale of the company.  Massively FCF/share accretive as they only used $200M of stock and $3.4B debt.  Management cites 17/18 pro forma avg FCF jumping from $2.67 GTN standalone to $4.39 combined GTN/Raycom.  Yes, that includes projected synergies but these were straightforward and conservative and as noted are already done.  Also ‘17/’18 does not include a presidential election year and does not capture the rolling impact of growth in contractual net retrans.  To be fair the FCF # does include the use of NOLs, but the recurring # is still close to $4 looking backwards. 

$1.75B mkt cap + $4.35B debt = $6.1B TEV.   $775M - $800M avg ‘19/’20 EBITDA so 7.6-7.8X EBITDA.  HUGE FCF: $4-$4.25 Avg ‘19/’20, so rapid deleveraging and no debt maturities until 2024.

Good Assets: #1 or #2 in 87 of their 93 markets.  Highly rated in both Local News and All Day ratings.  This investment in quality local news drives, higher ad spend, retrans leverage and market share of political ad spend.

MVPDS growth offsetting cord cutting. When people cut the cord many still want the local news/sports.  GTN is part of the package on HULU, ROKU and many others. Have 1.3M OTT subs and growing.  OTT subs doubled from Dec 2017 to Dec 2018.  I am not ignoring the long term risk of cord cutting or broader shifts in TV/content viewing I just believe that GTN and certain other broadcasters have strengths to compete as the landscape evolves. OTT is an 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.

Political Advertising will set all-time records in 2020 election cycle. Already starting to percolate.  GTN is in many key swing states, including all of the 9 most competitive Senate races.   Politics is LOCAL.   ‘19/’20 EBITDA/ FCF avg is $775-$800M/ $4-$4.25 but ’20 could be $900M / $5.

Retrans dynamic is built-in growth and will account for over 50% of revs at high margins.  Renewals kick in 2019/2020/2021. Yes, there will be headlines about consents and contracts and blackouts, see GTN-Fox, NXST-ATT/DTV, SBGI-Charter), but the core dynamic is that retrains revenue will grow well through upcoming renewals and some portion of the gains will be shared back to the major networks.  To be clear, the networks want retrains to grow as well, they just want their “fair” share.

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/’21 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).

Another Deal?   GTN is only 24% of TV HH so it is one of the few players who can still do a meaningful deal under the 39% Cap.    If the cap is lifted, GTN could be bought.  The industry continues to consolidate and private equity has been an aggressive participant of late.

FCF yield around 24% now, target more like 15-16% or $25-$28.  Would be 8.5X avg 19/20 EBITDA with a full year of deleveraging.    Has already been $25 this year and political tailwind is just starting.

Longer term ASC 3.0 represents an interesting opportunity for GTN (and SBGI, NXST and others).

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.

Catalysts:

Conservative Management Delivers

2020 Election Cycle Political Ad Boom

Valuation Gap to NXST/SBGI closes

Ad business not as bad as feared.

Digital, retrains, etc continue to grow.

Caps lifted, another round of consolidation.

Catalyst

Catalysts