Gray Communications Systems, Inc. Business Information, Profile, and History

Company Perspectives:

Gray Communications Systems, Inc. owns and operates businesses in three media segments: broadcasting, publishing and paging. Gray's broadcasting division includes seven network-affiliated television stations in medium size markets in the southeastern United States, of which six are ranked number one in their respective markets. The broadcasting division also owns and operates two satellite uplink businesses. Gray's publishing division consists of three daily newspapers and two weekly, advertising only publications. Gray's paging division owns and operates a paging company which serves three southern states with approximately 56,000 pagers in operation. Significant operating advantages and cost saving synergies are realized through the size of Gray's television station group and the regional focus of its television, publishing and paging operations. These advantages and synergies include (i) sharing television production facilities, equipment and regionally oriented programming, (ii) the ability to purchase television programming for the group as a whole, (iii) negotiating network affiliation agreements on a group basis and (iv) purchasing newsprint and other supplies in bulk. In addition, Gray's focus can provide advertisers with an efficient network through which to advertise in the fast-growing Southeast.

History of Gray Communications Systems, Inc.

Established in 1946 by James H. Gray, a native New Englander who relocated to southeast Georgia, Gray Communications Systems, Inc. has grown since 1993 into a modern communications company through a series of acquisitions. For many years James Gray and his company embodied small-town power in Albany, Georgia, where he controlled the town's only newspaper and television station. He also served as the town's mayor for more than ten years. After Gray died in 1986, the terms of his will threw the company into turmoil, and his heirs were unable to maintain control of the company. Finally, a major new investor emerged in 1993, and the company began to acquire television stations and newspaper properties in the southeastern United States. At the beginning of 1998 Gray Communications owned eight network-affiliated television stations in medium-size markets in the southeastern United States and was in the process of adding three more stations. More than half of its 1,020 employees were employed in television, with the remaining in newspapers and paging.

Established in 1946 with the Purchase of the Albany Herald

James H. Gray's newspaper career began with writing for the Hartford (Connecticut) Courant and later the New York Herald Tribune. Gray was born into New England society, the son of a Massachusetts lawyer, and attended Dartmouth College in New Hampshire. Gray became interested in Albany, Georgia, through his first wife, Dorothy Ellis. Her father was a wealthy Massachusetts businessman who owned a plantation in Albany and spent four months of the year there.

Gray had his eye on the Albany Herald in the early 1940s, but his plans to purchase the newspaper were delayed by the onset of World War II. Gray served in Europe as a paratrooper during the war after taking basic training at Fort Benning, Georgia. After serving in World War II, he moved his family to Albany and purchased the Albany Herald. Albany was the largest city in southwest Georgia, and the Herald was a monopoly newspaper.

Gray Started Albany's Television Station in 1954

In 1954 Gray started his television station, WALB, in Albany. It was only the second television station in the state after Atlanta's WSB. WALB became an NBC affiliate, broadcasting with a VHF signal (channels 2 through 13 on the dial at that time) that was stronger than UHF signals. WALB's signal could be picked up as far away as Jacksonville, Florida. Gray later bought television stations in Louisiana and Florida, first purchasing WJHG in Panama City, Florida, in 1960, and then KTVE serving El Dorado, Arkansas-Monroe, Louisiana, in the late 1960s.

Throughout the 1960s, 1970s, and the first half of the 1980s, Gray Communications and James Gray personified small-town power in the South. He not only controlled Albany's only television station and newspaper, he also served as the city's mayor for 13 years. He was president of the local chamber of commerce five times. For a long while he served as chairman of the Albany Water, Gas and Light Commission, which took in twice as much money as the city government and in some ways was more powerful. Some citizens called him "Lord Jim" and "Citizen Gray."

In the 1980s he was dedicated to reviving Albany's decaying urban center. He spearheaded the building of Albany's new $15 million, 10,000-seat civic center, which was named for him. At the time of his death in 1986, he was putting $3 million of his own money into the Central Square project to revive the city's ailing downtown district.

James Gray's Death in 1986 Affected the Company's Ownership, Fortunes

In September 1986, while recovering from surgery to correct a circulatory problem in his leg, James H. Gray died of a heart attack at the age of 70. At the time of his death, his 50.5 percent of Gray Communication's stock was worth an estimated $50 million. Since 1977 the stock had climbed from around $10 per share to $130 per share in December 1985, giving the company an estimated market value of about $65 million. Traded in the over-the-counter market, the company's stock rose from $140 to $200 per share in the months following Gray's death.

The company was in good financial shape when Gray died. It had $4 million in cash, only $600,000 in debt, and a strong record of profitability. It earned $3.5 million in 1986, a 13 percent return on equity. After the company's stock rose from around $60 to above $130, the Atlanta Business Chronicle named Gray Communications "Public Company of the Year."

Gray's Will Put His Stock in Trust for His Heirs

Gray rewrote his will in 1974 when he married his second wife, Cleair Ranger Gray. He put his 50.5 percent of the company stock into a trust to be divided among his children: James Gray, Jr., Geoffrey Gray, and his daughter Constance (Connie) Greene. Under the terms of the will, the heirs were forced to either work together, sell their stock to each other, or sell out together. No one heir could sell his or her portion of the stock without approval from the others. The will also named Terry P. McKenna, Gray's longtime corporate and personal attorney, as executor of Gray's estate, keeper of the trust, and president of Gray Communications.

For two years McKenna worked to reach a settlement between the estate and Gray's second wife, Cleair Gray, who contested the will that originally left her only $20,000 a year. She claimed the elder Gray had promised her stock in the company in exchange for her promise not to divorce. In 1988, she accepted a settlement worth $750,000, plus $10,000 a month for life and two houses.

Following the settlement, disputes between the three siblings began. The will had the effect of forcing the three children to remain in the business together or to get out of it together. Geoffrey and Connie wanted to get out of the business. They accused their older brother of not being able to raise enough financing to purchase their stock. None of the siblings could sell their stock to outsiders without permission from the others. As a result, all three had to borrow heavily to pay inheritance taxes.

In August 1990 the company's board rejected James Gray, Jr.'s latest offer as inadequate. It was his second offer to buy the company from his siblings. They accused him and his advisers of being greedy. James Gray, Jr., was portrayed in the media and around town as a driven man with "an inherited role to play." He was named by Georgia Trend magazine as one of the state's 100 most powerful people. Some thought his stature and public achievements, which included taking over Albany's civic development and becoming editor of the newspaper, were bitterly resented by his younger siblings.

In April 1991 James Gray, Jr., filed two lawsuits to remove Terry P. McKenna from the estate, charging that he was blocking the sale of the estate. The suits asked that the stock owned by the estate either be sold to an outsider or equally distributed among the three heirs. The suits were canceled at the last minute, though, as McKenna and the Gray family sought to repay a $21 million bank loan that was coming due.

In an attempt to end the Gray's majority interest in the company, the board of directors voted in August 1991 to buy 25 percent of the Gray stock for a fair-market price of $17.50 per share, or $30 million. The heirs would retain a 26 percent interest in the company. Like many other media companies, Gray Communications had lost considerable value over the previous five years. Revenues had fallen from $52 million in 1986 to $27.5 million in 1991. Then in the spring of 1992 Gray Communications' stock opened on NASDAQ's small-cap market and bottomed at $8 per share, causing concern among other shareholders over the price paid for the Gray family stock in 1991.

New Investor Emerged in 1993

Toward the end of 1992 the board announced it would consider offers for all or part of the assets of the company. It received about 40 offers, of which one director said there were a half-dozen serious offers. Then in March 1993 Robert Prather, president and CEO of Bull Run Corporation of Atlanta, Georgia, bypassed the board and approached the Grays directly. He offered them $17 a share for their remaining 25.8 percent interest in the company. As part of the deal, the Grays and Connie's husband would resign from the board of directors. Bull Run's investors included J. Mack Robinson, an Atlanta businessman whom Forbes magazine had included on its list of the 400 wealthiest Americans.

John Williams, formerly with the Texas-based newspaper company Harte-Hanks Communications, Inc., was named president and CEO to replace McKenna. Williams focused on transforming the Albany Herald from an afternoon to a morning newspaper. Among the improvements he made were installing new electronic hardware for the paper's newsroom, advertising, and circulation departments, doubling the size of the news staff, and hiring a new management team. That included hiring new general managers for the company's three television stations and bringing in a new publisher for the Albany Herald.

In August 1993 the Grays prepared to sell their remaining 25.8 percent interest in Gray Communications to Robert Prather's Atlanta-based investment group for $13.5 million. The sale was subject to approval by the Federal Communications Commission (FCC), because Gray owned both a television station and a newspaper in Albany, an arrangement that was no longer permitted under federal regulations but that was grandfathered in under Gray ownership.

Prather intended to acquire additional newspapers in the Southeast. The company adopted a plan to grow through strategic acquisitions. The driving forces behind Gray's acquisition strategy were Prather and Williams. They intended to make Gray a regional media company, with "regional" defined as the Southeast, not just Georgia.

Gray Communications Began to Grow Through Acquisitions, 1993

Gray Communications began implementing its strategy of growth through acquisitions in October 1993, when it submitted the highest bids for two television stations in Kentucky that were owned by the failed Kentucky Central Life Insurance Co. The stations were WKYT-TV of Lexington and WYMT of Hazard, Kentucky. The sale to Gray was subject to the approval of Kentucky's Insurance Commissioner Don Stephens, because the state had taken control of the troubled Kentucky Central in February 1993.

CEO and President John Williams said, "Stations of the quality of these two very seldom come on the market. The only reason that these came on the market was because of Kentucky Central's troubles." He told the [Louisville] Courier-Journal that the two stations would be the "crown jewels" of Gray Communications. WKYT had been the dominant local news station in Lexington for many years. The company expected to keep WKYT's general manager, Ralph Gabbard, because the station was doing well.

However, the acquisition was challenged by the heirs to Garvie Kincaid, who built Kentucky Central into the state's second largest insurance company in 1976. They maintained that Kentucky's insurance commissioner did not have the right to sell off the business's non-insurance properties. Gray petitioned the FCC to dismiss the challenge, and in September 1994 a court ruling allowed Gray to complete its acquisition of WKYT and WYMT. WKYT in Lexington, the nation's 69th largest market, gave Gray its first top 100 station. The two stations would increase Gray's annual revenues from around $27 million to more than $40 million. Gray paid $38 million for the stations in its winning bid.

Acquired Second Newspaper in 1994

On May 31, 1994, Gray acquired its second newspaper, the Rockdale Citizen, based in Conyers, Georgia, a suburb of Atlanta. While the total price was not disclosed, Gray issued 150,000 shares of stock with a current market value of $2 million as part of the purchase price of $4.8 million. With a circulation of 10,600, the Monday-through-Friday suburban newspaper added only about $2.5 million in annual gross income. More importantly it gave Gray a presence in the Atlanta suburban newspaper market.

Joe Cunningham was brought in to be the Rockdale Citizen's publisher. He was formerly circulation manager for the Gwinnett Daily News, which was shut down in 1992 by its parent, the New York Times Co., after attempting to wage a circulation war with the Atlanta Journal Constitution. Cunningham told the Atlanta Constitution, "I have a one-word marketing campaign when it comes to competing with The Atlanta Journal Constitution, and that is don't." Corporate executives viewed Rockdale County as a small market in its own right rather than as an Atlanta suburb. For fiscal 1994, Gray Communications reported net income of $2.8 million on revenues of $36.5 million.

In January 1995 Gray acquired its third newspaper, the Gwinnett Post-Tribune, for $3.7 million. Later in the year Gray announced it would change the newspaper's name to the Gwinnett Daily Post and expand its distribution schedule from three times a week and make it a daily published every Tuesday through Saturday. The newspaper's circulation was 14,100. Gwinnett was the fourth largest county in metropolitan Atlanta. It was served by the Gwinnett Daily News until that newspaper was shut down in 1992. Its competitor, the Gwinnett Extra, was published every weekday by the Atlanta Journal Constitution and had a circulation of 62,774.

Gray's goal was to increase the Gwinnett Daily Post's circulation to 20,000 over the course of the year. In addition to increasing the newspaper's frequency, Gray doubled the size of its newsroom staff to 19 and added comics and national news briefs. Journal Constitution publisher Dennis Berry said, "I have a lot of respect for the Gray Communications company. They are well-financed. They are ambitious, and they are a competitor to watch." Gray's major stockholder was J. Mack Robinson, a wealthy Atlanta businessman and principal financier of Bull Run Corporation. Directly and indirectly through Bull Run, Robinson had increased his ownership of Gray Communications to 44 percent of the outstanding shares.

For fiscal 1995, Gray Communications reported net income of $930,969 on revenues of $58.6 million. During the year Gray's stock was listed for the first time on the New York Stock Exchange. Gray was placing more emphasis on its television holdings and less on its newspapers. John Williams, Gray's newspaper-trained president, resigned in late 1995. Just three months after expanding the staff of the Gwinnett Daily Post, the company laid off one-third of the staff there. In January 1996, Gray laid off 29 of the Albany Herald's 200 employees. Further problems in the newspaper segment became apparent when the Rockdale Citizen's editor, Barry King, and publisher, Joe Cunningham, left.

In 1995 the company's broadcast division's profit margins were rising as those of the publishing division were falling. Newly named president Ralph Gabbard, who continued to work out of Lexington, told the Atlanta Constitution that Gray's publishing unit has been profitable, "but it wasn't anywhere near where it should be." In addition to its three newspapers, Gray's publishing division included seven advertising weeklies in south Georgia and north Florida.

More Television Stations Were Acquired in 1996

In January 1996 Gray acquired WRDW-TV, the CBS affiliate in Augusta, Georgia, for $37.2 million. It became Gray's sixth television station and was the top-rated station in the Augusta market. Gray now owned three NBC-affiliated and three CBS-affiliated television stations in the Southeast.

In February 1996, the Atlanta Constitution observed the transformation taking place at Gray Communications. With three newspapers and eight television stations, "It took Albany-based Gray Communications [two years] to explode its image as a sleepy family-led south Georgia newspaper publisher and become a hot southeastern media player." In October Fortune magazine ranked Gray Communications as the nation's 81st fastest growing company with an annual growth rate of 48 percent.

In its single largest acquisition to date, Gray had also made an offer to First American Media, Inc., of Tallahassee, Florida, for WCTV-TV, the CBS affiliate in Tallahassee, Florida/Thomasville, Florida; WVLT-TV, the CBS affiliate in Knoxville, Tennessee; Satellite and Production Business Services based in Tallahassee; and PortaPhone, a communications and paging business in the Southeast. The purchase price was $183.9 million, and the deal closed in September 1996.

Gray sold KTVE serving Monroe, Louisiana-El Dorado, Arkansas, on August 20, 1996, for $9.5 million in cash plus approximately $829,000 worth of accounts receivable. In addition to closing the deal with First American in September, which marked its entry into the paging business, Gray completed a public offering of its Class B common stock and 10.5 percent senior subordinated notes, resulting in net proceeds to Gray of more than $200 million. The company also issued $200 million worth of preferred stock and entered into a new bank credit facility of $125 million. These actions were taken as part of a financing plan to increase liquidity and improve operating and financial flexibility. For fiscal 1996, Gray Communications reported net income of $2.5 million on revenue of $79.3 million.

The company also underwent a change in leadership. In September 1996, newly named president and CEO Ralph Gabbard died unexpectedly at the age of 50 of a heart attack. Gabbard was credited with giving Gray a national presence in the broadcast industry by serving as chairman of the National Association of Broadcasters' Television Board and as chairman of the CBS Affiliates Advisory Board. J. Mack Robinson, chairman of the board of Bull Run Corporation, was named Gray's interim president and CEO. Prather, who was also president and CEO of Bull Run, became Gray's interim executive vice-president&mdashquisitions.

Acquisitions Continued in 1997

In January 1997 Gray announced its intention to purchase Gulflink Communications, Inc., a transportable satellite uplink business based in Baton Rouge, Louisiana. The acquisition was completed in April. The acquisition complemented the company's existing satellite transmission and production services business, Lynqx Communications.

In February 1997 Gray continued with its strategy of acquiring broadcast properties in fast-growing markets in the Southeast by entering into an agreement to purchase WITN-TV from Raycom-US, Inc., who was in the process of acquiring the station from AFLAC Broadcast Group, Inc. Raycom had to sell the station, because under current FCC regulations Raycom also owned WECT-TV in Wilmington, North Carolina. WITN-TV served the Greenville-Washington-New Bern, North Carolina area, which included 236,000 television households and East Carolina University. The acquisition was completed on August 1, 1997.

During 1997 Gray boosted the circulation of the Gwinnett Daily Post by entering into agreements to provide copies of the daily paper to cable television subscribers. In one such agreement, the Daily Post provided newspapers to 20,000 metro Atlanta subscribers of Genesis Cable Communications LLC, which purchased the papers from the Daily Post.

Gray Began Looking for Acquisitions Outside the Southeast in 1998

In its first move into broadcast markets outside of the southeastern United States, Gray announced in January 1998 that it had entered into an agreement to acquire the assets of Busse Broadcasting Corporation, a Michigan-based company that owned three midwest television stations: KOLN-TV, the CBS affiliate in Lincoln, Nebraska; KGIN-TV in Grand Island, Nebraska; and WEAU-TV, the NBC affiliate in Eau Claire, Wisconsin. All three stations served fast-growing markets. They were the number one rated stations and local news leaders in their markets. The acquisition would bring to 11 the number of television stations owned by Gray Communications. The purchase price was approximately $112 million.

It appeared that, in order to comply with FCC regulations governing common ownership of television stations with overlapping service areas, Gray Communications would be forced to divest itself of WALB-TV in Albany, Georgia, and WJHG-TV in Panama City, Florida. However, the company received an extension from the FCC while the commission reviewed its rulemaking in this area.

At the beginning of 1998 Gray Communications owned eight network-affiliated television stations in medium-size markets in the southeastern United States. Five of the eight were affiliated with the CBS Television Network, and three were affiliated with the NBC Television Network. It was in the process of adding three more stations in the pending acquisition of Busse Broadcasting. It also owned three daily newspapers, two weekly advertising-only publications, a paging business, and satellite transmission and production services companies. For the future, it appeared that Gray Communications would continue to pursue its strategy of growth through selective acquisitions.