Gray Media, Inc. (GTN)

Executive Summary / Key Takeaways

• Gray Media is executing a strategic pivot from pure-play broadcaster to diversified local media platform, using accretive M&A and production assets to de-risk its traditional cyclical model while managing a heavy debt load.
• The broadcasting segment faces secular headwinds from cord-cutting and political revenue volatility, yet core advertising has proven resilient with Q3 2025 results beating guidance and management forecasting low single-digit growth into Q4.
• A $650 million bet on Assembly Atlanta production studios represents the company's most significant diversification effort, with management projecting it could become the company's largest cash flow generator within 12-24 months as occupancy reaches 70-80% and major partnerships with NBCUniversal and CBS drive utilization.
• July 2025's "transformational" debt refinancing extended maturities to 2033 while funding a wave of immediately cash flow accretive acquisitions that are expected to reduce leverage from 5.77x toward management's sub-4x target, improving financial flexibility.
• The 2026 political cycle offers substantial upside potential, with management anticipating "gargantuan" spending levels, but execution risks on the production studio investment and continued retransmission pressure from cord-cutting remain critical variables for the investment case.

Setting the Scene: Local Broadcasting's Structural Shift

Gray Media, Inc., originally founded in 1891 and headquartered in Atlanta, Georgia, operates the nation's largest portfolio of top-rated local television stations, reaching 113 markets and approximately 37% of U.S. television households. The company's core business model generates revenue through three primary streams: core local advertising, cyclical political advertising, and retransmission consent fees from cable and satellite providers. This structure has historically produced powerful cash flows during election years but created significant volatility in off-years, a pattern that defines the investment landscape for local broadcasters.

The industry sits at a critical inflection point. Traditional pay-TV subscribers continue declining as streaming alternatives capture viewership, directly pressing the retransmission fees that constitute up to half of broadcasters' annual revenue. Simultaneously, local news remains a surprisingly durable franchise, with Gray commanding the #1 rated station in 78 markets and the #1 or #2 position in 99 markets. This local moat provides pricing power and audience loyalty that national networks cannot replicate, creating a defensive barrier against pure-play digital competitors.

Gray's competitive positioning places it as the second-largest player by revenue behind Nexstar Media Group (NXST), which covers approximately 70% of U.S. households through 114 stations. Sinclair Broadcast Group (SBGI) operates 190 stations with a sports-heavy focus, while TEGNA Inc. (TGNA) concentrates on premium top-25 markets and The E.W. Scripps Company (SSP) maintains a smaller footprint with national news assets. Gray's differentiation lies in its mid-market density and secondary digital channel portfolio, which includes 44 Telemundo affiliates and multicast networks like MeTV that generate incremental revenue at minimal marginal cost.

Strategic Differentiation: Beyond the Broadcast Tower

Gray's most consequential strategic shift involves moving beyond traditional broadcasting into content production and sports rights, creating new revenue streams that are less vulnerable to cord-cutting and political cycles. The Assembly Atlanta production facility represents the centerpiece of this transformation. With approximately $650 million invested thus far, the studio complex has reached 70-80% occupancy through partnerships with NBCUniversal, CBS daytime programming, and various film productions. Management's assertion that Assembly Atlanta could become the company's "biggest cash flowing operation" within 12-24 months is not hyperbole—it reflects a deliberate strategy to monetize underutilized real estate and production capacity in a content-hungry market.

The economics of this investment appear compelling. The company expects net capital investment in Assembly Atlanta to be zero for 2025 due to anticipated reimbursements from the Doraville Community Improvement District, effectively making the expansion self-funding. Hulu renewed a third-season show expected to occupy three stages, while CBS extended its daytime soap "Beyond the Gates" for a second season, providing stable, long-term revenue visibility. This contrasts sharply with the broadcasting segment's quarterly volatility and suggests a path toward more predictable cash flows.

Simultaneously, Gray has aggressively expanded its local sports rights portfolio, growing from a single Phoenix Suns and Mercury partnership to covering nearly 80% of its markets through 13 regional sports networks. Deals with the Atlanta Braves and Dallas Stars create what management calls a "halo effect," where advertisers initially attracted to game broadcasts rediscover the power of local broadcast reach and subsequently buy other dayparts. This strategy directly counters the national sports focus of Sinclair while creating a differentiated local offering that streaming platforms cannot easily replicate.

Financial Performance: Managing Through the Cycle

Gray's third-quarter 2025 results illustrate both the resilience and fragility of the current model. Total revenue of $749 million came in at the high end of guidance, while operating expenses of $592 million fell $17 million below the low end, demonstrating management's disciplined cost control. However, the year-over-year revenue decline of 21% reveals the brutal impact of political cyclicality, with political advertising collapsing from $173 million in Q3 2024 to just $8 million in Q3 2025.

The broadcasting segment's $724 million in revenue declined 21.6% year-over-year, yet core advertising showed surprising strength. The reported 3% decline in core advertising becomes a 1% increase when adjusting for the $16 million Olympic boost in the prior year, suggesting underlying demand remains stable despite macroeconomic uncertainty. Automotive advertising remains weak, down high single digits, but services categories like legal and financial grew at double-digit and high single-digit rates respectively, indicating successful diversification away from cyclical categories.

Retransmission consent revenue declined 6% to $346 million, reflecting subscriber losses and the impact of WANF's transition to independent status. This pressure is structural, not cyclical, and represents the single greatest threat to long-term profitability. Network affiliation fees declined 9% as the company renewed CBS agreements for 52 markets on flat-to-lower rates, marking the first-ever year-over-year decrease in these payments. Management anticipates this trend will continue and potentially accelerate, which could actually benefit net retransmission revenue if the decline in payments outpaces the decline in receipts.

The production segment, while small at $25 million in quarterly revenue, showed promising operating leverage with segment operating income of $7 million for the nine-month period, up 133% year-over-year. This demonstrates that the Assembly Atlanta investment is beginning to generate meaningful returns, though the segment remains a minor contributor to overall results.

Balance Sheet Transformation: Deleveraging Through Accretive M&A

July 2025's debt refinancing fundamentally altered Gray's financial profile. The company issued $900 million of 9.625% senior secured second lien notes due 2032 and $775 million of 7.25% senior secured first lien notes due 2033, using proceeds to redeem 2027 notes and repay portions of term loans. This extended the maturity profile to 2033 with less than 25 basis points of incremental cost, providing substantial breathing room for the company's 5.77x total leverage ratio.

The refinancing enabled an aggressive M&A push in mid-2025 that added a net six new markets and created 11 new Big Four full-power duopolies. The "first-of-its-kind" five-market asset swap with The E.W. Scripps Company, acquisitions from Sagamore Hill Broadcasting, Block Communications, and Allen Media Group collectively position Gray to improve its portfolio quality while generating immediate cash flow accretion. Management explicitly stated these transactions would "contribute to our efforts to improve and enhance our company's balance sheet," signaling that deleveraging remains the top capital allocation priority.

This playbook mirrors the successful Raycom acquisition in 2019, where Gray levered up to 5.5x-5.6x before rapidly deleveraging to 3.5x within 18 months. While management acknowledges the world has changed—interest rates are higher and the regulatory environment more uncertain—the core strategy remains intact: use scale to generate cash, then deploy that cash to reduce leverage and create strategic optionality. The company finished Q3 2025 with over $900 million in liquidity and $232 million available under its share repurchase authorization, providing flexibility for opportunistic capital deployment.

Outlook and Execution Risk: The 2026 Catalyst

Management's guidance for Q4 2025 core advertising revenue reflects cautious optimism, with low single-digit growth expected based on October's low double-digit performance and slightly positive pacing for November and December. This represents a meaningful improvement from the mid-single-digit declines seen earlier in 2025, suggesting the advertising market has stabilized. The automotive category, while still weak, is expected to flatten out at a new run rate down low single digits, removing a major drag on growth.

The 2026 political cycle represents the most significant near-term catalyst. Following recent election outcomes that showed strong Democratic performance, management anticipates a "gargantuan" upsurge in political spending, particularly from Democratic donors who may increase fundraising. Early Q1 2026 numbers are described as "very encouraging," and the company's broad market footprint positions it to capture a disproportionate share of the estimated $6-8 billion in total political ad spending expected for the midterm cycle. This creates substantial operating leverage, as political advertising carries minimal incremental cost and can boost EBITDA margins by 500-1000 basis points in peak quarters.

However, execution risks remain material. The YouTube TV carriage dispute affecting Gray's ABC stations is "frustrating," with management noting they have "no control over the outcome." This highlights the structural disadvantage broadcasters face against virtual MVPDs , which can drop local stations without direct negotiation. While this dispute affects a limited portion of retransmission revenue, it exemplifies the broader risk that networks and distributors will continue to squeeze local broadcasters.

The Assembly Atlanta investment carries significant execution risk. While occupancy has reached 70-80% and management projects it could become the company's largest cash flow generator, the $650 million capital commitment represents nearly 20% of the company's enterprise value. If content production demand softens or key tenants depart, the return on this investment could fall short of expectations. The company's ability to monetize the mixed-use aspects of the campus through joint ventures and asset sales will be critical to achieving the projected returns.

Risks and Asymmetries: What Could Break the Thesis

The investment case faces three primary threats that could materially impair earnings power. First, cord-cutting could accelerate beyond current projections, causing retransmission revenue to decline faster than the 2-6% quarterly rates seen in 2025. With retransmission fees representing 40-50% of total revenue, a structural acceleration to 10-15% annual declines would overwhelm cost savings and core advertising growth, making the 5.77x leverage ratio unsustainable. The WANF transition to independence, while strategically sound, exacerbates this risk by removing network affiliation payments that previously subsidized local content creation.

Second, regulatory changes could disrupt the M&A strategy that underpins the deleveraging plan. FCC Chairman Brendan Carr has expressed support for reforming ownership laws, calling the 39% national audience cap "arcane," but the regulatory environment remains uncertain. Kevin Latek, Gray's Chief Legal and Development Officer, noted that "the government being shut for so long has clearly delayed our efforts to work on that approval process," and that "no one knows what the rules actually are." If ownership restrictions tighten or if the FCC fails to relax the 1940 "one-to-a-market" rule , Gray's ability to create duopolies and achieve cost synergies would be severely constrained.

Third, the production studio strategy could fail to scale as projected. While Assembly Atlanta shows promise, the production segment generated only $70 million in revenue through the first nine months of 2025, representing less than 3% of total revenue. For this investment to justify its $650 million cost, the segment would need to generate $100-150 million in annual EBITDA within two years—a steep ramp that assumes continued demand from streaming platforms and networks. If content production shifts to other markets or if key partners like NBCUniversal reduce their footprint, the asset could become a stranded investment.

On the positive side, several asymmetries could drive upside beyond current expectations. A relaxation of FCC ownership rules would unlock a wave of consolidation opportunities, allowing Gray to deploy its liquidity and create additional duopolies at attractive multiples. The company's success in securing local sports rights demonstrates an ability to create unique, non-replicable content that streaming platforms cannot easily disintermediate. If Gray can extend this strategy to additional markets and sports properties, it could build a regional sports network portfolio that generates stable, growing affiliate fees.

Valuation Context: Discounted for Leverage and Execution Risk

At $5.33 per share, Gray Media trades at a significant discount to broadcasting peers on most valuation metrics. The company's enterprise value of $6.13 billion represents 1.83x trailing twelve-month revenue, compared to Nexstar at 2.45x, TEGNA at 1.92x, and Sinclair at 1.46x. This discount reflects both the market's concern about leverage and the execution risk inherent in the production studio strategy.

Cash flow multiples appear more attractive, with the stock trading at 1.09x operating cash flow and 1.36x free cash flow, both well below peer averages. However, these metrics must be viewed in context of the company's debt burden. The total leverage ratio of 5.77x exceeds all major peers: Nexstar at approximately 4x, TEGNA at 2x, and Sinclair at 3x. This elevated leverage creates a higher cost of capital and limits financial flexibility, justifying at least a portion of the valuation discount.

The 6.00% dividend yield, while attractive, consumes significant cash flow with a 74.42% payout ratio. Management has maintained the $0.08 quarterly dividend despite leverage concerns, suggesting confidence in cash generation but also indicating limited capital for growth investments beyond the production studio. The company's return on equity of 3.36% and return on assets of 3.75% trail most peers, reflecting both the debt burden and the margin compression seen in 2025.

For valuation to re-rate toward peer levels, Gray must demonstrate progress on two fronts: reducing total leverage below 4x through a combination of EBITDA growth and debt paydown, and delivering on the Assembly Atlanta cash flow projections. If the production segment can generate $100 million in annual EBITDA by 2027, it would justify a higher multiple by diversifying revenue and reducing dependence on political cycles. Conversely, if leverage remains elevated and cord-cutting accelerates, the stock could trade at a permanent discount to peers despite the attractive asset base.

Conclusion: A Transforming Broadcaster at a Crossroads

Gray Media stands at a critical juncture where successful execution of its diversification strategy could create a more resilient, higher-valued local media company, while missteps could leave it burdened with excessive leverage and impaired assets. The broadcasting segment's ability to maintain core advertising stability despite political headwinds and retransmission pressure demonstrates the durability of its local news moat, but this alone is insufficient to drive meaningful equity appreciation.

The company's fate hinges on three variables: the magnitude of the 2026 political cycle, the cash flow generation from Assembly Atlanta, and the pace of cord-cutting impact on retransmission revenue. If political spending reaches the "gargantuan" levels management anticipates, 2026 EBITDA could exceed $1.2 billion, providing substantial deleveraging firepower. If Assembly Atlanta achieves management's projection of becoming the largest cash flow generator, it would validate the $650 million investment and create a new growth narrative. If cord-cutting stabilizes at current rates, the company can manage retransmission declines through cost controls and network fee reductions.

The balance between these factors creates a highly asymmetric risk/reward profile. Downside risks include accelerated cord-cutting, regulatory constraints on M&A, and production studio underperformance, any of which could pressure the stock toward $3-4 per share. Upside scenarios featuring strong political spending, successful studio monetization, and FCC deregulation could drive the stock toward $8-10, representing 50-90% upside from current levels. For investors willing to accept the execution risk, Gray Media offers a rare combination of a discounted valuation, substantial near-term catalysts, and a management team with a proven track record of deleveraging through strategic acquisitions.