Note 2 - Acquisitions and Dispositions

12 Months Ended

Dec. 31, 2015

Mergers, Acquisitions and Dispositions Disclosures [Text Block]

2.	Acquisitions and Dispositions

During 2015, 2014 and 2013, we entered into a number of acquisition and disposition transactions. The acquisition transactions were and are expected to, among other things, increase our revenues and cash flows from operating activities, and allow us to operate more efficiently and effectively by increasing our scale and providing us with the ability to negotiate more favorable terms in our agreements with third parties.

During 2015, we completed six acquisitions which added seven television stations to our operations (the “2015 Acquisitions”) and two dispositions which divested three television stations from our operations. In addition, at December 31, 2015 we had several pending transactions.

2015 Acquisitions:

Cedar Rapids Acquisition

On September 1, 2015, we entered into an asset purchase agreement with The Cedar Rapids Television Company and The Gazette Company to acquire the assets of KCRG-TV, which is affiliated with the ABC Network and serves the Cedar Rapids, Iowa television market (the “Cedar Rapids Acquisition”). Also on September 1, 2015, we acquired certain non-license operating assets of this station and entered into a local programming and marketing agreement (the “LMA”) with the licensee. Under the terms of the LMA, we operated the station subject to the control of the seller and its obligations under the station’s FCC license. As a result of the terms of the LMA, we included the operating results of the station in our financial statements beginning on September 1, 2015. On October 1, 2015 we acquired the non-license related real estate assets of KCRG-TV. The acquisition was completed on November 1, 2015 with the acquisition of the FCC license and license related assets. The total purchase price for the station assets was $100.0 million, and was funded with cash on hand.

Odessa Acquisition

On July 1, 2015, we acquired from ICA Broadcasting I, LTD, the assets of KOSA-TV, whose digital channels are affiliated with the CBS and MY Networks and which station serves the Odessa-Midland, Texas television market (the “Odessa Acquisition”). The total purchase price paid was $33.6, million and was funded with cash on hand.

Twin Falls Acquisition

On July 1, 2015, we acquired from Neuhoff Media Twin Falls, LLC the assets of KMVT-TV, whose digital channels are affiliated with the CBS and CW Networks, as well as KSVT-LD, whose digital channel is affiliated jointly with the FOX and MY Networks. These stations serve the Twin Falls, Idaho television market (the “Twin Falls Acquisition”). The total purchase price paid was $17.5 million, and was funded with cash on hand.

Wausau Acquisition

On July 1, 2015, we acquired from Davis Television Wausau, LLC certain non-license assets of WFXS-TV, which had served as the FOX affiliate for the Wausau-Rhinelander, Wisconsin television market (the “Wausau Acquisition”). On that date WFXS-TV ceased operating, and we began broadcasting its former program streams on our digital low power television station in Wausau, WZAW-LD. The total purchase price paid was $14.0 million, and was funded with cash on hand.

Presque Isle Acquisition

On July 1, 2015, we acquired from NEPSK, Inc. the assets of WAGM-TV, whose digital channels are affiliated with the CBS and FOX Networks and which station serves the Presque Isle, Maine television market (the Presque Isle Acquisition”). The total purchase price paid was $10.3 million, and was funded with cash on hand.

Laredo Acquisition

On July 1, 2015, we acquired from Eagle Creek Broadcasting of Laredo, LLC certain non-license assets of KVTV-TV, which had served as the CBS affiliate for the Laredo, Texas television market (the “Laredo Acquisition”). On that date KVTV-TV ceased operating, and we began broadcasting its former program streams on our digital low power television station in Laredo, KYLX-LD. The total purchase price paid was $9.0 million, and was funded with cash on hand.

The estimated fair values of the acquired assets, assumed liabilities and the resulting goodwill from the 2015 Acquisitions are summarized as follows (in thousands):

	Acquisition
	Cedar Rapids			Odessa			Twin Falls			Wausau			Presque Isle			Laredo

Other current assets	$	503		$	87		$	93		$	87		$	45		$	22
Property and equipment		13,754			4,629			5,172			1,985			2,822			1,411
Goodwill		25,006			3,719			2,587			11,616			245			5,154
Broadcast licenses		55,676			22,253			6,333			-			6,150			-
Other intangible assets		5,849			3,067			3,485			397			1,039			2,435
Other non-current assets		13			13			32			87			-			13
Current liabilities		(792	)		(155	)		(170	)		(85	)		(51	)		(22	)
Other long-term liabilities		(13	)		(13	)		(32	)		(87	)		-			(13	)

Total	$	99,996		$	33,600		$	17,500		$	14,000		$	10,250		$	9,000

These amounts are based upon management’s estimate of the fair values using valuation techniques including income, cost and market approaches. In estimating the fair value of the acquired assets and assumed liabilities, the fair value estimates are based on, among other factors, expected future revenue and cash flows, expected future growth rates, and estimated discount rates.

Property and equipment are recorded at their fair value and are being depreciated over their estimated useful lives ranging from three years to 40 years.

The amount related to other intangible assets primarily represents the estimated fair values of retransmission agreements of $9.7 million; advertising client relationships of $1.0 million; and income leases of $5.4 million. These intangible assets are being amortized over the estimated remaining useful lives of 5.3 years for retransmission agreements; 9.6 years for advertising client relationships; and 16.9 years for income leases. Goodwill is calculated as the excess of the consideration transferred over the fair value of the identifiable net assets acquired and liabilities assumed, and represents the future economic benefits expected to arise from other intangible assets acquired that do not qualify for separate recognition, including assembled workforce, as well as expected future synergies. We expect that goodwill of $48.3 million will be deductible for tax purposes. We believe that the value of a television station is derived primarily from the attributes of its broadcast license rather than its network affiliation. Consistent with that determination, no fair value was separately allocated to the acquired network affiliation agreements in our 2015 Acquisitions. The primary areas of the preliminary purchase price allocation included in the table above, which are not yet finalized, relate to the fair values of property and equipment and residual goodwill. Management expects to continue to obtain information to assist in finalizing these preliminary valuations during the measurement period (up to one year from the acquisition date).

In connection with completing the 2015 Acquisitions, we incurred transaction costs totaling $6.5 million that are included in our corporate and administrative expenses.

Montana

Dispositions

On September 1, 2015, we donated the FCC license and certain other assets of KMTF-TV in Helena, Montana, which formerly simulcast the CW channel broadcast by our KTVH-D2, to Montana State University (“MSU”). This donation allowed MSU to operate a full power PBS affiliated television station in the state’s capital for the first time, augmenting the statewide PBS network that MSU operates. We recorded a loss on disposal of approximately $0.1 million related to this donation.

On November 1, 2015, we sold to Cordillera Communications, LLC television station KBGF-TV, the NBC affiliate for the Great Falls, Montana television market, and television station KTVH-TV, the NBC and CW affiliate for the Helena, Montana television market. Total consideration received was $3.0 million, and we recorded a gain on disposal of approximately $0.9 million related to this disposition in 2015.

Pending Acquisitions

See Note 11 “Subsequent Events” for discussion of the Schurz Acquisition and Related Transactions, completed in February 2016.

2014 Acquisitions:

Hoak Acquisition

On June 13, 2014, we completed the acquisition of 100% of the capital stock of certain wholly owned subsidiaries of Hoak Media, LLC (“Hoak”) for total purchase price of approximately $299.9 million (the “Hoak Acquisition”). The following stations were acquired in the Hoak Acquisition:

Station	Network Affiliation		Market

KSFY-TV		ABC	Sioux Falls, SD
KABY-TV*		ABC	Sioux Falls, SD
KPRY-TV*		ABC	Sioux Falls, SD
KVLY-TV		NBC	Fargo-Valley City, ND
KNOE-TV		CBS	Monroe- El Dorado, LA
KFYR-TV		NBC	Minot-Bismarck-Dickinson, ND
KMOT-TV*		NBC	Minot-Bismarck-Dickinson, ND
KUMV-TV*		NBC	Minot-Bismarck-Dickinson, ND
KQCD-TV*		NBC	Minot-Bismarck-Dickinson, ND
KALB-TV		NBC/CBS	Alexandria, LA
KNOP-TV		NBC	North Platte, NE
KIIT-LP		FOX	North Platte, NE
* satellite station

The Hoak Acquisition also included our assumption of Hoak’s interest in certain operating agreements, and the acquisition of certain non-license assets, of KHAS-TV, which served the Lincoln-Hastings, Nebraska market. On June 13, 2014, we transferred the programing of KHAS-TV to KSNB-TV, a station owned by Gray that also serves the Lincoln-Hastings, Nebraska, market. We used borrowings under the Senior Credit Facility, defined below, to fund the purchase price to complete the Hoak Acquisition.

As a component of the Hoak Acquisition, Gray assumed Hoak’s rights under certain agreements with Parker Broadcasting, Inc. (“Parker”) to provide back-office services, sales support and limited programming to KXJB-TV and KAQY-TV (each, a “Parker Agreement”). The Parker Agreements terminated upon the completion of the Parker Acquisition (defined below).

The Hoak Acquisition also included two subsidiaries with television stations located in the Panama City, Florida (KREX) and Grand Junction, Colorado (WMBB) markets. On June 13, 2014, in conection with the Hoak Acquisition, we divested those subsidiaries in exchange for $33.5 million. This amount is not included in our total purchase price for Hoak.

SJL Acquisition

On September 15, 2014, we acquired from SJL Holdings, LLC and SJL Holdings II, LLC, 100% of the capital stock of the entities that own and operate WJRT-TV and WTVG-TV, respectively, which are the ABC-affiliated television stations serving the Flint-Saginaw-Bay City, Michigan, and Toledo, Ohio, television markets, respectively, for total purchase price of $131.5 million (the “SJL Acquisition”). We funded the SJL Acquisition with a combination of cash from operations and borrowings under our Senior Credit Facility.

KEVN Acquisition

On May 1, 2014, we acquired from Mission TV, LLC 100% of the capital stock of the entity that operates KEVN-TV and its satellite station, KIVV-TV (collectively, the “KEVN Stations”) The KEVN Stations are affiliated with FOX and serve the Rapid City, South Dakota market. The total purchase price to complete the KEVN Acquisition was approximately $8.8 million (the “KEVN Acquisition”). The purchase price to complete the KEVN Acquisition was funded with a combination of cash from operations and borrowings under our prior senior credit facility.

KNDX Acquisition

On May 1, 2014, we acquired from Prime Cities Broadcasting, Inc. (“Prime Cities”) certain assets of KNDX-TV and its satellite station KXND-TV, as well as certain non-license assets of low power stations KNDX-LP and KXND-LP. These four stations served as FOX affiliates for the Minot-Bismarck, North Dakota television market. On June 13, 2014, we transferred the programing of KNDX-TV and KXND-TV to the television stations that we acquired from Hoak in the Minot-Bismarck, North Dakota television market. On June 27, 2014, we acquired the low power FCC licenses of KNDX-LP and KXND-LP from Prime Cities. We refer to the acquisition of these assets from Prime Cities as the “KNDX Acquisition.” The total purchase price was $7.5 million, which was funded with a combination of cash from operations and borrowings under our prior senior credit facility.

Parker Acquisition

Also in 2014, we acquired 100% of the capital stock of two of Parker’s subsidiaries, Parker Broadcasting of Dakota, LLC and Parker Broadcasting of Louisiana, LLC (collectively, the “Parker Acquisition”). Parker Broadcasting of Dakota, LLC owned certain non-license assets of KXJB-TV, which was affiliated with the CBS network and served the Fargo, North Dakota television market. Parker Broadcasting of Louisiana LLC owned certain non-license assets of KAQY-TV, which was affiliated with the ABC network and served the Monroe, Louisiana television market. On September 25, 2014, we completed the acquisition of the outstanding capital stock of Parker Broadcasting of Louisiana LLC and transferred the programing of KAQY-TV to KNOE-TV, a station owned by Gray that also serves the Monroe, Louisiana, television market. On December 1, 2014, we completed the acquisition of Parker Broadcasting of Dakota, LLC and transferred the programming of KXJB-TV to KVLY-TV, a station owned by us that also serves the Fargo, North Dakota television market. Upon the completion of the Parker Acquisition, the Parker Agreements were terminated.

The purchase price to complete the Parker Acquisition was $6.7 million, of which approximately $1.7 million was allocated to the Parker Broadcasting of Louisiana transaction, and $5.0 million was allocated to the Parker Broadcasting of Dakota transaction. The purchase price to complete the Parker Acquisition was funded with a combination of cash from operations and borrowings under our Senior Credit Facility.

WQCW Acquisition

On April 1, 2014, we acquired the assets of WQCW-TV, Portsmouth, Ohio from Lockwood Broadcast Group (the "WQCW Acquisition"). WQCW-TV serves as the CW affiliate for the Charleston/ Huntington, West Virginia television market, where we own and operate WSAZ-TV, the market's NBC affiliate. The purchase price to complete the WQCW Acquisition was approximately $5.5 million, which was funded with cash from operations.

Helena Acquisition

On November 1, 2014, we acquired from Beartooth Communications Company the assets of KTVH-TV and KBGF-LD, which are NBC affiliates in the Helena, Montana and Great Falls, Montana markets, respectively; and on December 1, 2014, we acquired from Rocky Mountain Broadcasting Company the assets of KMTF-TV the CW affiliate for the Helena, Montana market (together, the “Helena Acquisition”). Total purchase price for both acquisitions was approximately $1.9 million, which was funded with cash from operations

The estimated fair values of the acquired assets, assumed liabilities and the resulting goodwill from the 2014 Acquisitions are summarized as follows (in thousands):

	Acquisition
	Hoak			SJL			KEVN			KNDX			Parker			WQCW			Helena

Cash	$	-		$	-		$	615		$	-		$	-		$	-		$	-
Accounts receivable		10,722			7,132			569			-			765			-			14
Other current assets		509			1,946			96			39			964			45			49
Property and equipment		45,382			23,508			3,888			2,576			722			991			1,230
Goodwill		131,632			50,941			2,717			1,839			1,932			802			70
Broadcast licenses		91,958			86,685			1,675			500			-			3,691			146
Other intangible assets		35,386			10,091			1,786			2,584			3,163			15			431
Other non-current assets		-			253			29			15			16			-			-
Current liabilities		(3,544	)		(4,936	)		(211	)		(36	)		(826	)		(45	)		(90	)
Other long-term liabilities		-			(379	)		(38	)		(17	)		(5	)		-			-
Deferred income tax liabilities		(12,188	)		(43,712	)		(2,341	)		-			-			-			-

Total	$	299,857		$	131,529		$	8,785		$	7,500		$	6,731		$	5,499		$	1,850

Accounts receivable are recorded at their fair value that represents the amount we expect to collect. Gross contractual amounts receivable are approximately $0.3 million more than their recorded fair value.

Property and equipment are recorded at their fair value and are being depreciated over their estimated useful lives ranging from three years to 40 years.

The amount related to other intangible assets primarily represents the estimated fair values of retransmission agreements of $34.2 million; advertising client relationships of $13.1 million; and income leases of $4.1 million. These intangible assets are being amortized over the estimated remaining useful lives of 4.4 years for retransmission agreements; 5.5 years for advertising client relationships; and 8.3 years for income leases. We expect that goodwill of $88.6 million related to asset acquisitions and stock acquisitions that are treated as asset acquisitions based on the tax elections made relating to the 2014 Acquisitions will be deductible for tax purposes. As described above, no fair value was separately allocated to the acquired network affiliation agreements in our 2014 Acquisitions.

In connection with completing the 2014 Acquisitions, we incurred transaction costs totaling $6.2 million that are included in our corporate and administrative expenses in the year ended December 31, 2014.

2013 Acquisitions:

Acquisition of Yellowstone Television, LLC

Effective October 31, 2013, we entered into an agreement to acquire Yellowstone Television, LLC (“Yellowstone”).

On November 1, 2013, Yellowstone acquired the following television stations:

●

KGNS-TV in the Laredo, Texas television market. Its channels are affiliated with NBC, CW, and Telemundo;

●

KGWN-TV in the Cheyenne, Wyoming-Scottsbluff, Nebraska television market. Its channels are affiliated with CBS and CW. KGWN-TV extends throughout the market on KSTF (TV) in Scottsbluff, Nebraska, and K19FX in Laramie, Wyoming;

●

KCHY-LP, which is the NBC affiliate for the Cheyenne-Scottsbluff television market; and

●

KCWY-TV in the Casper, Wyoming television market. Its primary channel is affiliated with NBC.

We paid $23.0 million for 99% of the outstanding equity interests in Yellowstone and incurred fees of approximately $0.2 million in connection with this acquisition, which fees were expensed upon incurrence. The acquisition was financed with cash from operations. In connection therewith, we entered into a put and call option agreement with the owner of Yellowstone, which we exercised and completed on October 2, 2014, acquiring the remaining 1% of the equity of Yellowstone for $10.0 million. The total purchase price for this acquisition was approximately $32.7 million.

Transactions with Excalibur

In the fourth quarter of 2013, we entered into a series of transactions with the News-Press Gazette Company and Excalibur Broadcasting, LLC (together with its subsidiaries, “Excalibur”), pursuant to which we began providing services to one new full-power station and associated low-power stations, and we acquired the programming streams of all of those stations (collectively, the “Excalibur Acquisition”). On October 31, 2013, Gray and Excalibur consummated the acquisition of KJCT-TV, which broadcasts ABC, CW, Telemundo and local programming in the Grand Junction, Colorado, market. At that time, Excalibur acquired the license assets of KJCT-TV for approximately $3.0 million, and we acquired various non-license assets related to KJCT-TV for approximately $9.0 million. Gray financed this acquisition with cash from operations. In connection therewith, we entered into a shared services agreement pursuant to which we provided certain services, including back office, engineering and sales support, and a lease agreement pursuant to which we provided studio and office space to Excalibur. Also in connection with these arrangements, we paid $0.5 million to enter into a put and call option agreement with Excalibur, which we exercised on December 15, 2014, acquiring the assets of Excalibur for a purchase price equal to their outstanding indebtedness of $2.9 million, which was then retired, resulting in a loss on extinguishment of debt of $0.2 million and the termination of our guarantee of Excalibur’s debt. Upon the acquisition of those assets, the primary license of KJCT-TV, the related transmitter and tower were sold to a third party for $75,000, resulting in a loss on disposal of assets of $269,000 in the year ended December 31, 2014. In addition to the tangible assets acquired, we also acquired the various program streams and network affiliations formerly broadcast by Excalibur, which we have transferred to our existing operations the Grand Junction, Colorado market. The total purchase price paid to acquire KJCT-TV was $12.0 million, which was funded with cash on hand.

The estimated fair values of the acquired assets, assumed liabilities and the resulting goodwill from the 2013 Acquisitions are summarized as follows (in thousands):

	Acquisition
	Yellowstone			Excalibur

Cash	$	95		$	-
Other current assets		280			91
Property and equipment		7,249			2,740
Goodwill		9,421			4,466
Broadcast licenses		14,305			4,161
Other intangible assets		1,709			633
Other non-current assets		70			-
Current liabilities		(304	)		(91	)
Long-term debt, less current portion		(86	)		-

Total	$	32,739		$	12,000

These amounts were based upon management’s estimate of the fair values using valuation techniques including income, cost and market approaches. In estimating the fair value of the acquired assets and assumed liabilities, the fair value estimates are based on, among other factors, expected future revenue and cash flows, expected future growth rates, and estimated discount rates.

The amount related to other intangible assets represents primarily the estimated fair values of retransmission agreements of $1.4 million and advertising client relationships of $0.6 million. These intangible assets are being amortized over the estimated remaining useful lives of 1.8 years for retransmission agreements and 7.1 years for advertising client relationships. Acquired property and equipment is being depreciated on a straight-line basis over the respective estimated remaining useful lives. Goodwill will be deductible for tax purposes.

Unaudited Pro Forma Financial Information

Pro Forma Data -

2015 Acquisitions

The following table sets forth certain unaudited pro forma information for the years ended December 31, 2015 and 2014 assuming that the 2015 Acquisitions occurred on January 1, 2014 (in thousands, except per share data):

	Year Ended December 31, 2015		Year Ended December 31, 2014

Revenue (less agency commissions)	$	621,530	$	559,538
Net income	$	46,181	$	59,342

Basic net income per share	$	0.68	$	1.03
Diluted net income per share	$	0.67	$	1.02

This pro forma financial information is based on each of Gray’s and the 2015 Acquisitions’ historical results of operations, adjusted for the effect of fair value estimates and other acquisition accounting adjustments, and is not necessarily indicative of what our results would have been had we completed each of the 2015 Acquisitions on January 1, 2014 or on any other historical date, nor is it reflective of our expected results of operations for any future period. The pro forma adjustments for the years ended December 31, 2015 and 2014 reflect depreciation expense and amortization of finite-lived intangible assets related to the fair value of the assets acquired, and the related tax effects of the adjustments. This pro forma financial information has been prepared based on estimates and assumptions that we believe are reasonable as of the date hereof, and are subject to change based on, among other things, changes in the fair value estimates or underlying assumptions.

In connection with completing the 2015 Acquisitions, we incurred a total of $6.5 million of transaction related costs in 2015, primarily related to legal, consulting and other professional services.

Net revenues and operating income of the businesses acquired in the 2015 Acquisitions included in our audited consolidated statements of operations for the year ended December 31, 2015 were $23.2 million and $8.6 million, respectively.

Pro Forma Data - Ho

ak Acquisition and SJL Acquisition

The following table sets forth certain unaudited pro forma results of operations of the Company for the years ended December 31, 2014 and 2013 assuming that the Hoak Acquisition and the SJL Acquisition, along with transactions necessary to finance the Hoak Acquisition and the SJL Acquisition, occurred on January 1, 2013 (in thousands, except per share data):

	Year Ended December 31, 2014		Year Ended December 31, 2013

Revenue (less agency commissions)	$	565,251	$	445,443
Net income	$	50,771	$	20,665

Basic net income per share	$	0.88	$	0.36
Diluted net income per share	$	0.87	$	0.36

This pro forma financial information is based on each of Gray’s, Hoak’s and SJL’s historical results of operations, adjusted for the effect of fair value estimates and other acquisition accounting adjustments, and is not necessarily indicative of what our results would have been had we completed each of the Hoak Acquisition, the SJL Acquisition and the related financing transactions on January 1, 2013 or on any other historical date, nor is it reflective of our expected results of operations for any future period. The pro forma adjustments for the years ended December 31, 2014 and 2013 reflect (i) depreciation expense and amortization of finite-lived intangible assets related to the fair value of the assets acquired, (ii) additional interest expense related to the financing of each of the Hoak Acquisition and the SJL Acquisition, (iii) the loss from early extinguishment of debt as if the amendment and restatement of our prior senior credit facility had ocurred on January 1, 2013, and (iv) the related tax effects of the adjustments. This pro forma financial information has been prepared based on estimates and assumptions that we believe are reasonable as of the date hereof, and are subject to change based on, among other things, changes in the fair value estimates or underlying assumptions.

In connection with completing the Hoak Acquisition and SJL Acquisition, in 2014 we incurred a total of $5.1 million of transaction related costs, primarily related to legal, consulting and other professional services. These costs were not included in the 2014 pro forma amounts presented above, but 2013 pro forma net income was adjusted to include these costs as if they were incurred in 2013 as they were directly attributable to the Hoak Acquisition and the SJL Acquisition.

Net revenues and operating income of the businesses acquired in the Hoak Acquisition and the SJL Acquisition included in our audited consolidated statements of operations for the year ended December 31, 2014 were $64.7 million and $25.8 million, respectively.

Pro forma financial information for each of the KEVN Acquisition, the KNDX Acquisition, the Parker Acquisition, the WQCW Acquisition, the Helena Acquisition, the Yellowstone Acquisition and the Excalibur Acquisition are not included, as such information is not material to our financial statements.