Note 3 - Acquisitions and Divestitures

9 Months Ended

Sep. 30, 2019

Notes to Financial Statements

Mergers, Acquisitions and Dispositions Disclosures [Text Block]

3. Acquisitions and Divestitures

During the nine-months ended September 30, 2019, we completed acquisition and divestiture transactions which we believe will, 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 could provide us with, among other things, the ability to negotiate more favorable terms in our agreements with third parties.

Raycom Merger

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:

		Station
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
	Consideration		Television
Purchaser	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 $234 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		(234	)		-		(234	)
Purchase consideration for assets acquired and liabilities assumed net of divestitures	$	3,426		$	17	$	3,443

United Acquisition

On May 1, 2019, we acquired the assets of WWNY-TV (CBS) and WNYF-CD (FOX) in Watertown, New York (DMA 178) and KEYC-TV (CBS/FOX) in Mankato, Minnesota (DMA 199) from United Communications Corporation (the “United Acquisition”) for an adjusted purchase price of $48 million of cash, excluding transaction related expenses. We began operating those stations on March 1, 2019 under a local programming and marketing agreement, which increased the total number of our markets from 91 to 93.

The following table summarizes the preliminary values of the assets acquired, liabilities assumed and resulting goodwill of the Raycom Merger and the United Acquisition together, the “2019 Acquisitions” (in millions):

	Raycom			United		Total
Cash	$	116		$	-	$	116
Accounts receivable, net		227			3		230
Program broadcast rights		12			-		12
Other current assets		26			-		26
Property and equipment		311			10		321
Operating lease right of use asset		52			-		52
Goodwill		834			3		837
Broadcast licenses		2,004			24		2,028
Other intangible assets		493			8		501
Other non-current assets		23			-		23
Accrued compensation and benefits		(29	)		-		(29	)
Program broadcast obligations		(16	)		-		(16	)
Other current liabilities		(60	)		-		(60	)
Income taxes payable		(12	)		-		(12	)
Deferred income taxes		(462	)		-		(462	)
Operating lease liabilities		(52	)		-		(52	)
Other long-term liabilities		(24	)		-		(24	)
Total	$	3,443		$	48	$	3,491

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 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 of the 2019 Acquisitions are 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 $313 million; favorable income leases of $76 million; and network affiliation agreements of $48 million. These intangible assets are being amortized over their estimated useful lives of approximately 4.4 years for retransmission agreements; approximately 9.0 years for favorable income leases; and approximately 4.0 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 $834 million of goodwill related to stations acquired and retained in the Raycom Merger, and $3 million of goodwill related to the stations acquired in the United Acquisition. A portion of the goodwill acquired, in the amount of approximately $150 million that was deductible by Raycom will be deductible by us for income tax purposes.

The Company’s consolidated results of operations for three and nine-months ended September 30, 2019 include the results of the Raycom Merger beginning on January 2, 2019 and the United Acquisition beginning on March 1, 2019. Revenues attributable thereto and included in our consolidated statement of operations for the three and nine-months ended September 30, 2019 were $274 million and $819 million, respectively. Operating income attributable thereto and included in our consolidated statement of operations was $63 million and $112 million for the three and nine-months ended September 30, 2019, respectively.

The following table summarizes the approximate “Transaction Related Expenses” incurred in connection with the 2019 Acquisitions, during the three and nine-months ended September 30, 2019, by type and by financial statement line item (in millions):

	September 30, 2019
	Three Months		Nine Months
	Ended		Ended
Transaction Related Expenses by type:
Legal, consulting and other professional fees	$	1	$	24
Incentive compensation and other severance costs		1		19
Termination of sales representation agreements		-		29
Total transaction related expenses	$	2	$	72
Transaction Related Expenses by financial statement line item:
Operating expenses before depreciation, amortization and loss (gain) on disposal of assets, net:
Broadcast	$	1	$	38
Corporate and administrative		1		34
Total transaction related expenses	$	2	$	72

Unaudited Pro Forma Financial Information.

The following table sets forth certain unaudited pro forma information for the nine-months ended September 30, 2019 and 2018 assuming that the 2019 Acquistions occurred on January 1, 2018 (in millions, except per share data):

	Nine Months Ended
	September 30,
	2019		2018
Revenue (less agency commissions)	$	1,546	$	1,547
Net income	$	142	$	110
Net income attributable to common stockholders	$	103	$	71
Basic net income per share	$	1.42	$	1.25
Diluted net income per share	$	1.42	$	1.24

This pro forma financial information is based on Gray’s historical results of operations and the historical results of operations of the television stations acquired, net of divestitures, included in the 2019 Acquisitions, 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 2019 Acquisitions 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 nine-months ended September 30, 2019 and 2018 reflect depreciation expense and amortization of finite-lived intangible assets related to the fair value of the assets acquired, transaction related 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.

Sioux Falls Acquisition

On September 25, 2019, we acquired KDLT-TV (NBC), in the Sioux Falls, South Dakota market (DMA 115), for $32.5 million, using cash on hand (the “Sioux Falls Acquisition”). Due to the proximity of the closing date of the Sioux Falls Acquisition to the balance sheet date and the filing date of this quarterly report, we were unable to present a preliminary purchase price allocation for the acquired business. The payment of the purchase price is included in our other non-current assets at September 30, 2019. Fair value estimates of assets acquired, liabilities assumed and resulting goodwill will be 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 liabilities assumed, the fair value estimates will be based on, among other factors, expected future revenue and cash flows, expected future growth rates, and estimated discount rates.