3 .	Acquisitions and Dispositions

December 31, 2018,

in order to facilitate regulatory approval of the Raycom Merger we sold the assets of WSWG-TV (CBS) (DMA

154

) in the Albany, Georgia television market to Marquee Broadcasting Georgia, Inc. for

$8.5

million in cash. In connection with the divestiture of WSWG-TV’s assets, we recorded a gain of approximately

$4.8

million.

During

2017

and

2016,

we completed 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, among other things, with the ability to negotiate more favorable terms in our agreements with

third

parties.

2017

Acquisitions

January 13, 2017,

we acquired the assets of KTVF-TV (NBC), KXDF-TV (CBS), and KFXF-TV (FOX) in the Fairbanks, Alaska television market (DMA

202

), from Tanana Valley Television Company and Tanana Valley Holdings, LLC for an adjusted purchase price of

$8.0

million (the “Fairbanks Acquisition”), using cash on hand.

January 17, 2017,

we acquired the assets of

two

television stations that were divested by Nexstar Broadcasting, Inc. upon its merger with Media General, Inc. (“Media General”): WBAY-TV (ABC), in the Green Bay, Wisconsin television market (DMA

), and KWQC-TV (NBC), in the Davenport, Iowa, Rock Island, Illinois, and Moline, Illinois or “Quad Cities” television market (DMA

102

), for an adjusted purchase price of

$269.9

million (the “Media General Acquisition”) using cash on hand. The Media General Acquisition was completed, in part, through a transaction with a VIE known as Gray Midwest EAT, LLC (“GME”), pursuant to which GME acquired the broadcast licenses of the stations. On

May 30, 2017,

we exercised an option to acquire the licenses held by GME pending receipt of proceeds from the FCC’s reverse auction for broadcast spectrum (the “FCC Spectrum Auction”). Upon receipt of the auction proceeds from the FCC on

August 7, 2017,

we completed the acquisition of the broadcast licenses from GME.

During the period that GME held those broadcast licenses we believe we were the primary beneficiary of GME because, subject to the ultimate control of the licensees, we had the power to direct the activities that significantly impact the economic performance of GME through the services we provided, and our obligation to absorb losses and right to earn returns that would be considered significant to GME. As a result, we included the assets, liabilities and results of operations of GME in our consolidated financial statements beginning on

January 17, 2017

and continuing through

August 7, 2017,

the date that we were

longer deemed to be the primary beneficiary of GME.

May 1, 2017,

we acquired the assets of WDTV-TV (CBS) and WVFX-TV (FOX/CW) in the Clarksburg-Weston, West Virginia television market (DMA

169

) from Withers Broadcasting Company of West Virginia (the “Clarksburg Acquisition”) for a total purchase price of

$26.5

million with cash on hand. On

May 13, 2016,

we announced that we agreed to enter into the Clarksburg Acquisition. On

June 1, 2016,

we made a partial payment of

$16.5

million and acquired the non-license assets of these stations. Also, on that date we began operating these stations, subject to the control of the seller, under a local marketing agreement (“LMA”) that terminated upon completion of the acquisition.

May 1, 2017,

we acquired the assets of WABI-TV (CBS/CW) in the Bangor, Maine television market (DMA

156

) and WCJB-TV (ABC/CW) in the Gainesville, Florida television market (DMA

159

) from Community Broadcasting Service and Diversified Broadcasting, Inc. (collectively, the “Diversified Acquisition”) for a total purchase price of

$85.0

million with cash on hand. On

April 1, 2017,

we began operating these stations, subject to the control of the seller, under an LMA that terminated upon completion of the acquisition.

August 1, 2017,

we acquired the assets of WCAX-TV (CBS) in the Burlington, Vermont – Plattsburgh, New York television markets (DMA

) from Mt. Mansfield Television, Inc., for an adjusted purchase price of

$29.0

million in cash (the “Vermont Acquisition”). On

June 1, 2017,

we advanced

$23.2

million of the purchase price to the seller and began to operate the station under an LMA, subject to the control of the seller. At closing, we paid the remaining

$5.8

million of the purchase price with cash on hand and the LMA was terminated.

We refer to the

eight

stations that we began operating and acquired (excluding the stations acquired in the Clarksburg Acquisition, which we began operating under an LMA in

2016

) during

2017

as the

“2017

Acquisitions.” The following table summarizes fair value estimates of the assets acquired, liabilities assumed and resulting goodwill of the

2017

Acquisitions and the Clarksburg Acquisition (in thousands):

	Acquisition
	Fairbanks			Media General			Clarksburg			Diversified			Vermont			Total

Current assets	$	122		$	666		$	462		$	361		$	312		$	1,923
Property and equipment		2,650			20,181			4,133			12,329			9,513			48,806
Goodwill		471			86,287			3,222			35,486			3,393			128,859
Broadcast licenses		2,228			149,846			17,003			26,219			7,592			202,888
Other intangible assets		2,702			13,398			2,234			11,051			5,191			34,576
Other non-current assets		71			282			51			27			3,310			3,741
Current liabilities		(140	)		(695	)		(554	)		(423	)		(311	)		(2,123	)
Other long-term liabilities		(84	)		-			(51	)		(50	)		-			(185	)
Total	$	8,020		$	269,965		$	26,500		$	85,000		$	29,000		$	418,485

These amounts are based upon management’s determination of the fair values using valuation techniques including income, cost and market approaches. In determining the preliminary fair value of the acquired assets and assumed liabilities, the fair values were determined 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

years.

Amounts related to other intangible assets represent primarily the estimated fair values of retransmission agreements of

$27.9

million; advertising client relationships of

$5.3

million; and favorable income leases of

$3.0

million. These intangible assets are being amortized over their estimated useful lives of approximately

5.1

years for retransmission agreements; approximately

10.7

years for advertising client relationships; and approximately

11.9

years for favorable 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 future synergies that we expect to generate from each acquisition. We recorded

$128.9

million of goodwill related to stations acquired in

2017.

The goodwill recognized related to these acquisitions is deductible for income tax purposes.

The Company’s consolidated results of operations for year ended

December 31, 2017

include the results of the

2017

Acquisitions from the date of each transaction. Revenues attributable thereto and included in our consolidated statement of operations for the year ended

December 31, 2017

were

$79.8

million. Operating income attributable thereto and included in our consolidated statement of operations for year ended

December 31, 2017

was

$33.7

million.

In connection with acquiring the

2017

Acquisitions, we incurred

$1.1

million of transaction related costs during the year ended

December 31, 2017,

primarily related to legal, consulting and other professional services.

2016

Acquisitions and Dispositions

February 16, 2016,

we completed the acquisition of the television and radio broadcast assets of Schurz Communications, Inc. (“Schurz”) for an adjusted purchase price of

$443.1

million plus transaction related expenses (the “Schurz Acquisition”).

To facilitate regulatory approval for the Schurz Acquistion, on

February 1, 2016,

we exchanged the assets of KAKE-TV (ABC) (and its satellite stations) in the Wichita, Kansas television market, for the assets of Lockwood Broadcasting, Inc.’s television station WBXX-TV (CW) in the Knoxville, Tennessee television market and

$11.2

million of cash (the “WBXX Acquisition”). In connection with the divestiture of KAKE-TV’s assets, we recorded a gain of approximately

$2.0

million, excluding transaction related expenses.

To further faciliate regulatory approvals for the Schurz Acquisition, on

February 16, 2016,

we exchanged the assets of WSBT-TV for the assets of Sinclair Broadcast Group, Inc.’s television station WLUC-TV (NBC/FOX) in the Marquette, Michigan television market (the “WLUC Acquisition”), and we sold the Schurz radio broadcast assets (the “Schurz Radio Stations”) for

$16.0

million to

three

third

-party radio broadcasters. We did

not

record a gain or loss related to the WLUC Acquisition or related to the divestiture of the Schurz Radio Stations because the fair value of the assets given were determined to be equal to the assets received.

The Schurz Acquisition, the WBXX Acquisition, the WLUC Acquisition, and the sale of the Schurz Radio Stations are referred to collectively as the “Schurz Acquisition and Related Transactions.” We used borrowings of

$425.0

million (the

“2016

Term Loan”) under our then-existing senior credit facility, as amended (the

“2014

Senior Credit Facility”), to fund a portion of the purchase price to complete the Schurz Acquisition and to pay a portion of the related fees and expenses, the remainder of which were paid from cash on hand. See Note

“Long-term Debt” for further information regarding our financing activities.

The net consideration to complete the Schurz Acquisition and Related Transactions was as follows (in thousands):

						Acquisition
						and the
	Divestiture			Acquisition		Acquisition
	of KAKE-TV			of WBXX-TV		of WLUC-TV			Total

Base purchase price	$	-		$	30,000	$	442,500		$	472,500
Purchase price adjustment		-			-		574			574
Adjusted purchase price		-			30,000		443,074			473,074
Cash consideration received from sale of Schurz Radio Stations		-			-		(16,000	)		(16,000	)
Net adjusted purchase price allocated to assets acquired and liabilities assumed		-			30,000		427,074			457,074
Non-cash consideration received		(30,000	)		-		-			(30,000	)
Cash consideration received		(11,200	)		-		-			(11,200	)
Net consideration - the Schurz Acquisition and Related Transactions	$	(41,200	)	$	30,000	$	427,074		$	415,874

June 27, 2016,

we completed the acquisition of KYES-TV (MY, Ant.), a television station serving the Anchorage, Alaska television market, from Fireweed Communications, LLC (the “KYES-TV Acquisition”). The purchase price of

$0.5

million, plus transaction related expenses, was paid with cash on hand.

We refer to the stations acquired and retained in

2016,

as well as the Clarksburg Acquisition, whose stations we began operating under an LMA in

June 2016,

as the

“2016

Acquisitions.” The fair values of the assets acquired, liabilities assumed and resulting goodwill of the television station acquisitions we completed in

2016

are summarized as follows (in thousands):

						Schurz
						Acquisition
						and the
	Acquisition		Acquisition			Acquisition
	of KYES-TV		of WBXX-TV			of WLUC-TV			Total

Accounts receivable	$	-	$	-		$	19,226		$	19,226
Other current assets		-		429			4,606			5,035
Property and equipment		176		1,633			97,814			99,623
Goodwill		28		10,288			61,981			72,297
Broadcast licenses		254		18,199			231,391			249,844
Other intangible assets		42		-			19,523			19,565
Other non-current assets		-		408			3,028			3,436
Current liabilities		-		(460	)		(8,903	)		(9,363	)
Other long-term liabilities		-		(497	)		(1,592	)		(2,089	)
Total	$	500	$	30,000		$	427,074		$	457,574

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

Accounts receivable are recorded at their fair value representing the amount we expect to collect. Gross contractual amounts receivable are approximately

$0.2

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

years.

Amounts related to other intangible assets represent primarily the estimated fair values of retransmission agreements of

$14.9

million; advertising client relationships of

$1.6

million; and favorable income leases of

$2.6

million. These intangible assets are being amortized over their estimated useful lives of approximately

4.9

years for retransmission agreements; approximately

5.5

years for advertising client relationships; and approximately

9.5

years for favorable income leases.

not

qualify for separate recognition, including assembled workforce, as well as future synergies that we expect to generate from each acquisition. We recorded

$72.3

million of goodwill related to stations acquired in

2016.

The goodwill recognized related to these acquisitions is deductible for income tax purposes.

The Company’s consolidated results of operations for year ended

December 31, 2016

include the results of the

2016

Acquisitions from the date of each transaction. Revenues attributable thereto and included in our consolidated statement of operations for the year ended

December 31, 2016

were

$130.4

million. Operating income attributable thereto and included in our consolidated statement of operations for year ended

December 31, 2016

was

$55.8

million.

In connection with acquiring the

2016

Acquisitions, we incurred

$7.4

million of transaction related costs during the year ended

December 31, 2016,

primarily related to legal, consulting and other professional services.

Unaudited Pro Forma Financial Information.

Pro Forma Data – Acquisitions Completed in

2017.

The following table sets forth certain unaudited pro forma information for the years ended

December 31, 2017

and

2016

assuming that the acquisitions completed in

2017

occurred on

January

2016

(in thousands, except per share data):

	Years Ended
	December 31,
	2017		2016

Revenue (less agency commissions)	$	895,081	$	926,799
Net income	$	260,909	$	88,679

Basic net income per share	$	3.57	$	1.23
Diluted net income per share	$	3.53	$	1.22

This pro forma financial information is based on Gray’s historical results of operations and the historical results of operations of the acquisitions completed in

2017,

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 acquired each of the stations acquired in

2017

January

2016

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, 2017

and

2016

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.

Pro Forma Data – Acquisitions Completed in

2016.

The following table sets forth certain unaudited pro forma information for the years ended

December 31, 2016

assuming that the acquisitions completed in

2016

occurred on

January

2016

(in thousands, except per share data):

	Years Ended
	December 31,
	2016

Revenue (less agency commissions)	$	825,787
Net income	$	57,795

Basic net income per share	$	0.80
Diluted net income per share	$	0.79

This pro forma financial information is based on Gray’s historical results of operations and the historical results of operations of the stations acquired in

2016,

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 acquired each of the stations acquired in

2016

January

2016

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 year ended

December 31, 2016

reflects 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 underlying assumptions.