Note 3 - Acquisitions and Divestitures

9 Months Ended

Sep. 30, 2021

Notes to Financial Statements

Mergers, Acquisitions and Dispositions Disclosures [Text Block]

3. Acquisitions and Divestitures

Quincy Transaction. On August 2, 2021, we completed the acquisition of all the equity interests of Quincy Media, Inc. (“Quincy”) for an adjusted purchase price of $930 million, which amount includes an additional $5 million for working capital. Quincy owned and operated television stations in 16 markets. Also on August 2, 2021, and concurrently with the acquisition of Quincy, we completed the divestiture to Allen Media (“Allen”) of television stations in seven markets previously owned by Quincy and located in our existing television markets, for an adjusted divestiture price of $398 million, which amount includes $18 million for working capital (the “Quincy Divestiture”). The Quincy Divestiture resulted in a non-cash loss of $48 million. We refer to the acquisition of Quincy and the Quincy Divestiture collectively as the “Quincy Transaction.”

The following table lists the stations acquired and retained, net of divestitures:

Current DMA Rank	Designated Market Area ("DMA")	Station Call Letters	Network Affiliations
104	Fort Wayne, IN	WPTA/WISE	ABC/NBC/CW
118	Peoria, IL	WEEK	NBC/ABC/CW
136	Duluth, MN, Superior, WI	KBJR/KDLH	NBC/CBS/CW
147	Sioux City, IA	KTIV	NBC/CW
156	Rochester, MN - Mason City, IA	KTTC	NBC/CW
158	Binghamton, NY	WBNG	CBS/CW
162	Bluefield-Beckley, WV	WVVA	NBC/CW
172	Quincy, IL	WGEM	NBC/FOX/CW

The following stations were acquired and divested in the Quincy Transaction:

Current DMA Rank	DMA	Station Call Letters	Network Affiliations
75	Tucson, AZ	KVOA	NBC
80	Madison, WI	WKOW	ABC
91	Paducah, KY - Harrisburg, IL	WSIL	ABC
92	Cedar Rapids, IA	KWWL	NBC
123	La Crosse-Eau Claire, WI	WXOW	ABC
132	Rockford, IL	WREX	NBC
134	Wausau-Stevens Point, WI	WAOW	ABC

The following table summarizes the allocation of consideration paid in the Quincy Transaction (in millions):

Adjusted purchase price	$	930
Less - consideration allocated to assets acquired and liabilities assumed for the Quincy overlap markets that were divested on August 2, 2021		383
Purchase consideration for assets acquired and liabilities assumed, net of divestitures	$	547

Third Rail Acquisition. On September 13, 2021, we acquired the studio, production and office facilities as well as the related production and administrative assets and liabilities of Third Rail Studios (“Third Rail”) from Third Rail Studios, LLC and Studio Sixty, LLC for an adjusted purchase price of $27 million of cash. We refer to this transaction as the “Third Rail Acquisition”. This transaction represents an initial step in the broader development of our planned studio production facilities.

Purchase Price Allocations. The following table summarizes the values of the assets acquired, liabilities assumed and resulting goodwill of the Quincy Transaction and the Third Rail Acquisition (together, the “2021 Acquisitions”), in millions:

	Quincy			Third Rail			Total
Cash	$	4		$	-		$	4
Accounts receivable, net		23			-			23
Other current assets		5			-			5
Property and equipment		73			24			97
Operating lease right of use asset		1			-			1
Goodwill		184			4			188
Broadcast licenses		245			-			245
Other intangible assets		86			-			86
Other current liabilities		(7	)		(1	)		(8	)
Deferred income taxes		(66	)		-			(66	)
Operating lease liabilities		(1	)		-			(1	)
Total	$	547		$	27		$	574

Due to the proximity of the acquisition date to the date of the filing of this quarterly report, 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 estimated 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.

Amounts related to other intangible assets are being amortized over their estimated useful lives of approximately 1 to 4 years.

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, as well as future synergies that we expect to generate from each acquisition. The goodwill recognized related to these acquisitions is deductible for income tax purposes.

Flint Divestiture. To facilitate regulatory approvals for the pending Meredith Transaction, on September 23, 2021, we divested our existing television station WJRT (ABC) in the Flint-Saginaw, Michigan market (DMA 64), to Allen for an adjusted purchase price of $72 million in cash, including working capital (the “Flint Divestiture”). The Flint Divestiture resulted in a non-cash loss of $5 million.

The Company’s consolidated results of operations for the nine-months ended September 30, 2021 includes the results of the Quincy Transaction beginning on August 2, 2020 and the Third Rail Acquisition beginning on September 13, 2021. Revenues attributable to the 2021 Acquisitions and included in our condensed consolidated statements of operations for the three and nine-months ended September 30, 2021 was $25 million, in each period.

The following table summarizes the approximate “Transaction Related Expenses” incurred in connection with the 2021 Acquisitions and the Flint Divestiture, during the three and nine-months ended September 30, 2021, by type and by financial statement line item (in millions):

	September 30, 2021
	Three Months		Nine Months
	Ended		Ended
Transaction Related Expenses by type:
Legal, consulting and other professional fees	$	11	$	19
Incentive compensation and other severance costs		-		-
Termination of financing agreement		-		7
Total Transaction Related Expenses	$	11	$	26
Transaction Related Expenses by financial statement line item:
Operating expenses before depreciation, amortization and loss (gain) on disposal of assets, net:
Broadcasting	$	-	$	-
Corporate and administrative		11		19
Miscellaneous (income) expense, net		-		7
Total Transaction Related Expenses	$	11	$	26

Unaudited Pro Forma Financial Information – 2021 Acquisitions. The following table sets forth certain unaudited pro forma information for the nine-months ended September 30, 2021 and 2020, assuming that the 2021 Acquisitions and the Flint Divestiture occurred on January 1, 2020 (in millions, except per share data):

	Nine Months Ended
	September 30,
	2021		2020
Revenue (less agency commissions)	$	1,751	$	1,678
Net income	$	126	$	153
Net income attributable to common stockholders	$	87	$	114
Basic net income attributable to common stockholders, per share	$	0.93	$	1.18
Diluted net income attributable to common stockholders, per share	$	0.92	$	1.18

This pro forma financial information is based on Gray’s historical results of operations and the historical results of operations of the businesses acquired, net of divestitures, included in the 2021 Acquisitions and the Flint Divestiture, adjusted for the effects 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 2021 Acquisitions and the Flint Divestiture, on January 1, 2020, 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, 2021 and 2020 reflect depreciation expense and amortization of finite-lived intangible assets related to the fair value of the assets acquired, Transaction Related Expenses and 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.

Lubbock Transactions. On December 31, 2020, we acquired television station KLCW-TV (CW) and certain low power television stations in the Lubbock, Texas market (DMA 142), as well as certain non-license assets of KJTV-TV (FOX) and two additional low power stations and certain real estate, for a combined purchase price of $24 million, using cash on hand. On that date, we also entered into a shared services agreement with SagamoreHill to provide news and back-office services to KJTV-TV and its associated low power stations using cash on hand (the “Lubbock Transactions”).

The following table summarizes the preliminary values of the assets acquired and resulting goodwill of the Lubbock Transactions (in millions):

Property and equipment	$	6
Operating lease right of use asset		1
Goodwill		6
Broadcast licenses		5
Other intangible assets		7
Other liabilities		(1	)
Total	$	24

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.

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 are being amortized over their estimated useful lives of approximately 1 to 4 years.

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, as well as future synergies that we expect to generate from each acquisition. The goodwill recognized related to this acquisition is deductible for income tax purposes.

Pending Acquisition

Acquisition of Meredith. On May 3, 2021, we entered into the Meredith Transaction, in which we agreed to acquire all outstanding shares of Meredith Corporation (“Meredith”), subject to and immediately after the spinoff of Meredith’s National Media Group to the current Meredith shareholders. The agreement was amended on June 2, 2021 and October 6, 2021, to revise the purchase consideration to $16.99 per share in cash, or $2.8 billion in total enterprise value and to modify certain terms of the agreement. The parties expect to close the transaction in the fourth quarter of 2021. At the closing, Gray will acquire Meredith’s remaining operating division, known as the Local Media Group, which owns 17 television stations in 12 local markets, adding 11 new markets to our operations.

The transaction is subject to approval of Meredith’s shareholders and customary closing conditions and regulatory approvals, including certain consents necessary to effectuate the spinoff of Meredith’s National Media Group immediately prior to the closing of our acquisition of Meredith.

Refer to Note 4. “Long-Term Debt” for a description of the debt financing arrangements related to this transaction.