Note 3 - Acquisitions and Divestitures

3 Months Ended

Mar. 31, 2019

Notes to Financial Statements

Mergers, Acquisitions and Dispositions Disclosures [Text Block]

3. Acquisitions and Divestitures

On

January 2, 2019,

we completed an acquisition of all the equity interests of Raycom Media, Inc. (“Raycom”). In connection with the acquisition of Raycom and on the same date, Gray assumed and completed Raycom’s pending acquisitions of WUPV-DT in the Richmond, VA market and KYOU-TV in the Ottumwa, IA market.  To facilitate regulatory approval of the acquisition of Raycom and to satisfy the conditions placed on the acquisition by the Antitrust Division of the U.S. Department of Justice (the “DOJ”) and the FCC, we completed the divestiture of

nine

television stations in overlapping markets. We refer to the acquisition of Raycom, WUPV-DT and KYOU-TV and the divestiture of the stations in the

nine

overlapping markets collectively as the “Raycom Merger.”

We believe the completion of the Raycom Merger is a significant step in our pursuit of strategic growth through accretive acquisition opportunities.The Raycom Merger completed our transformation from a small, regional broadcaster to a leading media company with nationwide scale based on high-quality stations with exceptional talent in attractive markets. The following table lists the stations acquired and retained, net of divestitures:

DMA	Designated Market Area	Call	Network
Rank	("DMA")	Letters	Affiliation
11	Tampa-St. Petersburg (Sarasota), FL	WWSB	ABC
19	Cleveland-Akron (Canton)	WOIO	CBS
19	Cleveland-Akron (Canton)	WUAB	CW
23	Charlotte, NC	WBTV	CBS
35	Cincinnati, OH	WXIX	FOX
37	West Palm Beach-Ft. Pierce, FL	WFLX	FOX
43	Birmingham (Ann and Tusc)	WBRC	FOX
48	Louisville, KY	WAVE	NBC
50	New Orleans, LA	WVUE	FOX
51	Memphis, TN	WMC	NBC
56	Richmond- Petersburg, VA	WWBT	NBC
56	Richmond- Petersburg, VA	WUPV	CW
66	Honolulu, HI	KHNL	NBC
66	Honolulu, HI	KGMB	CBS
66	Honolulu, HI	KHBC	NBC/CBS
66	Honolulu, HI	KOGG	NBC/CBS
73	Tucson (Nogales), AZ	KOLD	CBS
74	Columbia, SC	WIS	NBC
79	Huntsville- Decatur (Florence), AL	WAFF	NBC
88	Paducah, KY/Cape Girardeau, MO/
	Harrisburg, IL	KFVS	CBS
90	Shreveport, LA	KSLA	CBS
92	Jackson, MS	WLBT	NBC
93	Savannah, GA	WTOC	CBS
94	Charleston, SC	WCSC	CBS
95	Myrtle Beach-Florence	WMBF	NBC
97	Baton Rouge, LA	WAFB	CBS
97	Baton Rouge, LA	WBXH	MY
100	Boise, ID	KNIN	FOX
103	Evansville, IN	WFIE	NBC
114	Tyler-Longview, TX	KLTV	ABC
114	Tyler-Longview, TX	KTRE	ABC
116	Montgomery, AL	WSFA	NBC
127	Columbus, GA (Opelika, AL)	WTVM	ABC
129	Wilmington, NC	WECT	NBC
131	Amarillo, TX	KFDA	CBS
131	Amarillo, TX	KEYU	TEL
142	Odessa/Midland, TX	KCWO	CW
142	Odessa/Midland, TX	KTLE	TEL
143	Lubbock, TX	KCBD	NBC
148	Wichita Falls, TX & Lawton, OK	KSWO	ABC
148	Wichita Falls, TX & Lawton, OK	KKTM	TEL
152	Albany, GA	WALB	NBC/ABC
156	Biloxi-Gulfport, MS	WLOX	ABC/CBS
168	Hattiesburg/Laurel, MS	WDAM	NBC/ABC
180	Jonesboro, AR	KAIT	ABC/NBC
200	Ottumwa, IA/Kirksville, MO	KYOU	FOX/NBC

The divestiture transactions included

one

station owned by us. On

December 31, 2018,

we sold the assets of WSWG-TV (DMA-

152

) in the Albany, Georgia television market for

$8.5

million, excluding transaction related expenses to Marquee Broadcasting, Inc. and Marquee Broadcasting Georgia, Inc. In connection with the divestiture of the assets of WSWG-TV, we recorded a gain of approximately

$4.8

million in the

fourth

quarter of

2018.

On

January 2, 2019,

the following stations were acquired from Raycom and their assets were immediately divested in

eight

markets as follows (dollars in millions):

	Total
	Cash		Television
Purchaser	Consideration Received		Station	Location	DMA
Lockwood Broadcasting, Inc.	$	67	WTNZ	Knoxville, TN		60
			WFXG	Augusta, GA		105
			WPGX	Panama City, FL		150
			WDFX	Dothan, AL		173
Scripps Media, Inc.		55	KXXV	Waco-Temple-Bryan, TX		89
			KRHD	Waco-Temple-Bryan, TX		89
			WTXL	Tallahassee, FL		112
TEGNA, Inc.		109	WTOL	Toledo, OH		71
			KWES	Odessa - Midland, TX		142
Total	$	231

The allocated portion of net consideration paid for the assets and liabilities divested for the stations in these

eight

overlap markets was approximately

$233

million.

The net consideration paid to acquire Raycom consisted of

$2.84

billion of cash,

11.5

million shares of our common stock, valued at

$170

million (a non-cash financing transaction), and

$650

million of a new series of preferred stock (a non-cash financing transaction), for a total of

$3.66

billion. Please refer to Note

6

“Stockholders Equity” and Note

7

“Preferred Stock” for further information. The cash consideration paid to acquire the

two

stations that Raycom had previously agreed to acquire (KYOU-TV and WUPV-TV listed above) was

$17

million. The following table summarizes the consideration paid related to the Raycom Merger and the amount representing the net assets acquired and liabilities assumed (in millions):

				KYOU
				and		Net
	Raycom			WUPV		Consideration
Purchase price	$	3,660		$	17	$	3,677
Less - consideration allocated to all assets acquired and net of liabilites assumed for the Raycom overlap market stations which were also divested on January 2, 2019		(233	)		-		(233	)
Purchase consideration for assets acquired and liabilities assumed net of divestitures	$	3,427		$	17	$	3,444

The following table summarizes the preliminary values of the assets acquired, liabilities assumed and resulting goodwill of the Raycom Merger (in millions):

Cash	$	117
Accounts receivable		245
Program broadcast rights		12
Other current assets		21
Property and equipment		314
Operating lease right of use asset		52
Goodwill		822
Broadcast licenses		2,004
Other intangible assets		493
Other non-current assets		22
Accrued compensation and benefits		(30	)
Program broadcast obligations		(17	)
Other current liabilities		(59	)
Income tax reserves		(12	)
Deferred income taxes		(462	)
Operating lease liabilities		(52	)
Other long-term liabilities		(26	)
Total	$	3,444

These amounts are based upon management’s preliminary estimate 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. Because of the proximity of the closing date of the Raycom Merger to the filing of this quarterly report, the magnitude and complexity of the calculations involved and the inherent issues related to the integration of our operations, the valuation of the assets acquired, liabilities assumed and resulting goodwill is

not

yet final. However, we expect that any adjustments to these amounts reported in subsequent periods will

not

be material to our financial statements as a whole.

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

$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

40

years.

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

$305

million; favorable income leases of

$76

million; and network affiliation agreements of

$57

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

4.9

years for retransmission agreements; approximately

9.5

years for favorable income leases; and approximately

4.5

years for network affiliation agreements.

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

$822

million of goodwill related to stations acquired and retained in the Raycom Merger. A portion of the goodwill acquired, in the amount of approximately

$150

million, that was deductable by Raycom, will be deductable by us for income tax purposes.

The Company’s consolidated results of operations for

three

-months ended

March 31, 2019

include the results of the Raycom Merger beginning on

January 2, 2019.

Revenues attributable thereto and included in our consolidated statement of operations for the

three

-months ended

March 31, 2019

were

$280

million. Operating loss attributable thereto and included in our consolidated statement of operations for the

three

-months ended

March 31, 2019

was

$6

million.

In connection with the Raycom Merger, during the

three

-months ended

March 31, 2019,

we incurred approximately

$68

million of transaction related expenses. These expenses included approximately

$22

million of legal, consulting and other professional fees, approximately

$18

million of incentive compensation and severance costs and approximately

$28

million of expenses related to the termination of Raycom’s national sales representation agreements.

Unaudited Pro Forma Financial Information.

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

three

-months ended

March 31, 2019

and

2018

assuming that the Raycom Merger occurred on

January 

1,

2018

(in millions, except per share data):

	Three Months Ended
	March 31,
	2019			2018
Revenue (less agency commissions)	$	518		$	484
Net (loss) income	$	(2	)	$	6
Net (loss) income attributable to common stockholders	$	(15	)	$	(7	)
Basic net (loss) income per common share	$	(0.15	)	$	(0.08	)
Diluted net(loss) income per common share	$	(0.15	)	$	(0.08	)

This pro forma financial information is based on Gray’s historical results of operations and the historical results of operations of Raycom, 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 the Raycom Merger on

January 

1,

2018

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

three

-months ended

March 31, 2019

and

2018

reflect depreciation expense and amortization of finite-lived intangible assets related to the fair value of the assets acquired, transaction expenses, 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.