Mexican pay-TV and broadcasting behemoth, Grupo Televisa S.A. TV recently secured authorization from the U.S. telecom regulator Federal Communications Commission (FCC) to own up to 40% of U.S. Spanish-language TV network Univision Inc.'s voting stock and up to 49% of its common shares. Further, the FCC approved a move to raise the total number of shares in Univision that can be held by foreign investors to 49% from 25%.
In 2007, Univision was acquired by a consortium led by billionaire Haim Saban for a total consideration of $13.7 billion. Other investors were Madison Dearborn Partners, Providence Equity Partners, TPG and THL Partners. In early 2012, Televisa effectively purchased a 35% stake in Univision for $1.2 billion. Per the agreement, Televisa paid $130 million in cash for a 5% stake and purchased convertible debt for the remaining 30% stake.
Moreover, Televisa holds the right to buy an additional 5% stake over the next five years, which would effectively increase its potential ownership in Univision up to 40%. Currently, Televisa effectively holds a 38% (8% in equity and 30% in convertible debt) stake in Univision. This leaves scope for buying 2% stake in 2017.
Univision is the fifth largest TV network in the U.S. The company’s portfolio consists of two leading Spanish-language broadcast networks, several cable channels, TV stations and a chain of popular Spanish-language radio stations. Currently, a considerable share of Televisa’s income is generated from its U.S. operations, which includes the sale of content, website and cable TV. Televisa allows Univision to access its content and then rebroadcast it on TV and the Internet for a royalty. In the first half of 2016, Televisa’s royalty from Univision was $154 million, up nearly 9.4% year over year.
In 2014, the government of Mexico had introduced reforms within its telecommunications sector, which included the pay-TV segment as well. Factoring this development, the Mexican telecom regulator the Federal Telecommunications Institute (IFT) allowed Televisa to enter into the nation’s wireless market. However, the company is yet to take any decision.
Notably, the company’s reluctance is mainly due to the presence of large incumbent wireless operators such as America Movil SAB AMX, Telefonica SA TEF and AT&T Inc. T. America Movil currently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
On the other hand, the pay-TV market in Mexico is vastly untapped. Several industry researchers estimate pay-TV penetration in the country at roughly 60%, reflecting a massive opportunity for growth. Moreover, the U.S. Hispanic TV market is highly lucrative and is growing at a remarkable pace. Consequently, Televisa is poised to gain significantly as Univision will pay higher royalty.
Price Performance of Televisa
2016 was not a good year for Televisa. The stock lost a substantial 19.74% value in the last year in contrast with a 1.76% gain exhibited by the Broadcast Radio and TV industry. Growing competitive pressure in the Mexican pay-TV market from peers like TV Azteca and others along with shrinkage in operating margin are the near-term concerns. This is the primary reason behind the stock currently carrying a Zacks Rank #5 (Sell). We will closely monitor whether management can introduce any effective turnaround strategy in 2017.
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