Broadcast's new Meredith-Gray

Gray Television Inc. is stepping out of the shadows into the spotlight.

The company's planned purchase of Meredith Corp.'s 17 TV stations in a $2.7 billion cash deal is expected to close in the fourth quarter. The combined entity will benefit from greater scale and expects to bolster its position in the political advertising arena while opening up new national ad sales opportunities, executives said on a May 3 call.

With the deal, Gray will add stations in nine top 40 markets, including CBS (US)-affiliate WGCL and the independent station WPCH in Atlanta; CBS-affiliate KPHO and independent KTVK in Phoenix; FOX (US)-affiliate KPTV and MyNetworkTV (US) station KPDX in Portland, Ore.; and CBS-affiliate KMOX in St. Louis.

To facilitate regulatory approvals for the deal, Gray said it will retain Meredith's WNEM, a CBS affiliate in Flint-Saginaw, Mich., while divesting its WJRT-TV, the ABC (US) affiliate in that market. Gray said it will sell WJRT to an independent third party no later than the closing of the acquisition.

The proposed Meredith deal comes on the heels of Gray's purchase of TV stations owned by Quincy Media Inc. That deal is expected to close in either the current or third quarter following regulatory and other approvals.

Gray's portfolio — including the Meredith and Quincy stations, as well as the planned divestitures — will serve 36% of U.S. TV households in 113 local markets. Gray Executive Vice President Kevin Latek noted that in less than eight years, the company has "clearly come a very long way from a regional broadcaster serving just 30 markets."

Executive Chairman and CEO Hilton Howell said Gray was able to generate a significant amount of free cash flow with the 2020 election cycle overall, which was aided by the U.S. Senate runoffs in Georgia. Given the addition of the above-mentioned stations in Atlanta, the Meredith deal will augment Gray's position in its home state, where it will have presence in every market, outside of Macon, ahead of the upcoming gubernatorial and Senate elections. Howell added that with the Meredith deal, Grey will have Arizona and Nevada largely covered and wield an improved position in Missouri.

"I look forward to the political races in 2022 with these assets in place," said Howell. "We expect it to be a big, big year."

All told, Gray drove $430 million in political ad revenues during 2020. Meredith notched just under $118 million from the category in the fourth quarter of 2020, with its stations in the Atlanta and Phoenix markets accounting for 60% of that total.

Howell noted that the advertising split is currently at 80% local, versus 20% national. Given that the company anticipates continued growth on the local side, the shift may not be dramatic, but he believes there is upside on the national front. Gray is "going to take a crack at some new approaches on the ad sales side of our business," Howell said.

Gray expects to realize $55 million in annualized synergies that will be accretive to cash, with $25 million from a retransmission-consent fee upside. Under retransmission-consent agreements, distributors pay fees to broadcasters to transmit their stations' signals.

Assuming the year-end 2021 closing, Gray projects its total leverage ratio, net of all cash, would be approximately 5.3x on a trailing eight-quarter operating cash flow, including estimated annualized synergies from all announced transactions.

Meredith would be required to pay Gray a termination fee of $36 million, if it were to enter into a definitive agreement for a superior proposal or if it received an adverse recommendation by its board. Meredith would also have to pay certain costs incurred by Gray if the Meredith shareholder vote is not obtained or if the deal is not consummated by its specified closing date.

Conversely, Gray would be required to pay a $125 million fee to Meredith if the transaction is terminated due to Gray's breach of the agreement or failure to close.

Either party may terminate the agreement if the merger is not consummated on or before May 3, 2022, which may be extended to August 3, 2022, in certain circumstances.