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No Station Break for Broadcast Deals

It didn’t take long for the second shoe to drop in the anticipated broadcast-TV consolidation wave, with Gray Television announcing a $442.5 million purchase of Schurz Communications just days after Media General kicked off the anticipated frenzy with its $2.4 billion deal to acquire Meredith Corp.

Now the question is, what’s the next shoe to fall and how big will it be?

With the Schurz deal, Gray expands its reach to about 86 stations in 49 markets, including Anchorage, Alaska; South Bend, Ind.; and Rapid City, S.D. In a conference call with analysts after the deal was announced, Gray CEO Hilton Howell, Jr. said consolidation has become the “essence of our industry.”

Some analysts believe the bigger station groups will have greater sway in retransmission-consent negotiations with pay TV providers.

Gray has been an aggressive buyer in the past — it purchased about a dozen stations in small markets in the Southwest and Midwest over the past year before pulling out its checkbook for the Schurz deal.

The pipeline of potential deals is robust, Gray senior vice president of business affairs Kevin Latek said on the call. “Looking out over the next two, three years we think there will be more opportunities, probably more opportunities than we can afford.”

Gray has said that it has ample room for more deals. After Schurz, it will reach about 9.3% of the country, far below the Federal Communications Commission’s ownership cap of 39%. “We are nowhere near the cap,” Latek said on the call.

Gray won’t be alone in its quest for scale. In a recent research note, Noble Financial media analyst Michael Kupinski noted that Nexstar Broadcasting Group, which reaches about 18% of U.S. TV households — double that of Gray — has identified several potential deals.

Handicapping just who Gray might target next could be an exercise in futility — there are hundreds of small independent broadcasters that could be targets. But one interesting aspect of the deal is what Gray left on the table.

Schurz owns daily and weekly newspapers, including the South Bend Tribune, with a total circulation of about 225,000, and four cable systems in Arizona, Florida and Maryland, with about 90,000 subscribers, that are not part of the deal. According to some people in the cable community, Schurz is expected to continue to operate those businesses and could even look to grow its cable presence.

That’s unlike the Media General deal, which enthusiastically included Meredith’s publishing arm — home to iconic women’s magazines like Better Homes & Gardens, Ladies’ Home Journal, Parents and Shape. Those magazines also have a strong digital presence, which Media General hopes to further monetize.

But Wells Fargo analyst Marci Ryvicker has sensed a growing feeling among Media General investors that the publishing assets could be a drag on the overall company. And they weren’t happy with the deal’s multiple — about 11.5 times forward-looking cash flow — either.

“It sounds to us like top holders of Media General and some at Meredith are planning to vote this deal down,” Ryvicker said in a research note.

But they might not have enough voting clout to accomplish that.

The controversy might be for naught anyway. GAMCO Investors chairman Mario Gabelli, whose firm owns 7.9% of Meredith stock, told CNBC’s Squawk Box that Meredith Media General planned to sell its publishing unit to Time Inc.