Insider Buys Gray TV as Market Eyes M&A

 | Jun 21, 2013 | 4:00 PM EDT
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Gray Television (GTN) board member Harriett Robinson directly purchased 15,000 shares on June 18 at an average price of $6.94 per share, according to an SEC filing. Robinson, her spouse and associated trusts are major shareholders of Gray, a $410 million market cap owner of broadcast TV stations (on average more than 600,000 shares are traded per day, so at a price of about $7 there is more than $4 million in daily dollar volume.)

Gray's stock price has more than tripled year to date; in addition to decent analyst projections for next year, there has recently been quite a bit of M&A in broadcasting stations with Gannett (GCI) having recently announced an acquisition in the space and larger broadcaster Sinclair Broadcast Group (SBGI) publicly disclosing that it is looking for deals.

Markets appear to be speculating that Gray could be a target itself. Gannett's impending purchase of Belo (BLC) looks to come at close to 8.5 times trailing EBITDA; in contrast, even after its rise in price Gray's own EV/EBITDA multiple is about 7 times.

Looking at the company's most recent 10-Q, we see revenue was down 3% compared to the first quarter of 2012. The decline in revenue more or less fell straight to the bottom line, with a large percentage decrease in net income. Cash flow from operations for the quarter came to $18 million, and while this was a decline from a year earlier it was still high enough to cover Gray's investing activities.

Wall Street analysts are expecting a poor 2013 in terms of earnings per share, but then a sharp increase in EPS next year. As a result of these rosy forecasts, the current valuation represents a forward earnings multiple of only 7. We aren't comfortable basing an investment thesis on bullish projections from the sell-side, and are curious why Gray is expected to do so well in 2014 (as well as whether or not that level of performance would be sustainable), but these figures are worth noting in addition to the jump in M&A activity.

For purposes of comparison, Belo -- which, as we've mentioned earlier, is in the process of being acquired by Gannett -- experienced a small increase in revenue in the first quarter of 2013 compared with a year earlier, and in this case the relatively fixed level of costs resulted in a 17% increase in earnings. Analysts had also been projecting a large percentage increase in earnings per share between 2013 and 2014, though not to the degree that we saw when looking at Gray.

Operating margins between the two peers are actually somewhat similar. Given the difference in recent performance we would expect Gray to be valued about at its current EBITDA multiple in the event of an acquisition or at least slightly higher, in order to reflect an appropriate discount to Belo. Since any offer would necessarily be at a premium to the stock price, our guess is that Gray has risen too high to be an attractive acquisition target for now unless a buyer wants to pay close to the same multiple as Belo for a weaker performing company.

As a result we don't recommend imitating this insider purchase. In fundamental terms we'd want to see Gray start performing in line with the bullish trajectory analysts have set before we start considering whether forward earnings will in fact make the stock cheap at current prices. While there is increasing M&A activity in the industry, we are skeptical that acquirers would be eager to buy the company at a similar EBITDA multiple as the Belo deal -- which came from a strategic acquirer, no less. If anything, this may serve as a signal for investors to look at the broadcast TV industry more generally in search of more interesting companies.

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volatility is quite low here, and we could see some downsides here in the short term. ...



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