CBS Corporation (NYSE:CBS) is reportedly looking for significant reverse network compensation from Gray Television (NYSE:GTN) when its affiliation deal is up at the end of 2014 according to TVNewsCheck. I happen to agree with the premise of the article. Currently, Gray pays no reverse comp to CBS yet it is enjoying retransmission revenues from its CBS stations. This leads to a temporarily high broadcast cash flow margin. If the $0.90 in reverse comp that CBS is seeking pans out it would cost Gray an estimated incremental $45 million per year or about 20-25% of its broadcast cash flow of approximately $200 million (pro forma for acquisitions and averaged over 2012 and 2013 to normalize for even-year political advertising). I believe the Street is expecting something in the $0.50/sub range so anything close to $0.90 would be a huge negative for Gray. Hard to see Gray having a strong negotiating position especially given it has been paying CBS nothing in the past for the network's top rated content (including NFL). I am short GTN which trades at a rather "full" 10x my estimated 2014-15 average EBITDA. 8x seems more reasonable which would put the shares under $4.
Disclosure: I am short GTN.