Signing Out

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Entravision Communications’ recent decision to sell its 10,000 billboards in Los Angeles and New York at a loss signals a decision to focus on broadcast.


Analysts estimate the high selling price for the billboards at $156 million, but that would be a major loss considering that Entravision paid more than that for only 1,200 billboards in 2000.


Why would the company sell its billboard division at such a steep loss? The Santa Monica-based Entravision appears to be betting on faster growth on the broadcast side and wants to concentrate its efforts there.


And after seven years, executives may have realized that it just wasn’t an outdoor advertising company. Entravision couldn’t make 10,000 billboards work for them in a market where Clear Channel Outdoor Holdings Inc. has 800,000.


“We believe that the company doesn’t have the size or scale to maximize its return on these assets, and therefore could benefit from redeploying proceeds into its core business,” according to Standard & Poor’s Rating Services.


“The reason for the sale is simple: Entravision has underperformed the outdoor industry’s revenue growth over the last few years,” said Jonathan Jacoby of Bank of America.


The loss also results from timing. The company had bought the billboards when media properties were selling for top dollar. Values of many media properties have declined across the industry since then.


On Nov. 15, Chief Executive Walter Ulloa said Entravision would “explore strategic alternatives for our outdoor advertising operations in order to unlock the value of these assets to the benefit of our shareholders.” But he added: “We will also continue to build and invest in our TV and radio assets.”


The company plans to sell all of its 10,000 billboards, which go under the name Vista Media, in a single transaction.


The sale will bring about the end of Entravision’s ownership of non-broadcast media. The company controls 51 TV stations nearly all Spanish-language affiliates of Univision networks as well as 47 radio stations, mostly in Spanish. The new strategy will focus on developing clusters of TV and radio stations in cities with growing Hispanic communities.


In recent quarterly filings, Entravision has mentioned that national outdoor sales have declined, but local sales offset the erosion.


Local ads require a lot more work to sell, though.


“It’s easier to get a lot of money from one person than a little money from a lot of people,” said Rochelle Newman-Carrasco, chief executive at Enlace Communications, a Hispanic ad agency in Los Angeles. “Going market by market and dealing with local budgets takes a lot more of everything sales force, administration, time.”


Also, selling outdoor requires specialized knowledge of geography and maps, making it unfeasible to combine broadcast and outdoor sales forces. Local sales demand that salespeople do what Newman-Carrasco calls “riding the boards,” i.e., driving around with ad buyers to look at billboard locations. In contrast, national buyers can go online and see photos and maps, streamlining large transactions.


Potential buyers for Entravision’s billboards would be other media companies with outdoor portfolios, such as CBS Corp., Clear Channel or Regency Outdoor.


CBS Outdoor has more than 100,000 billboards and Clear Channel Outdoor has 800,000, allowing the companies to distribute their fixed costs over a larger asset base. Both companies already have Hispanic market divisions that compete with Entravision’s Vista.


Shares boosted


Investors reacted positively to news of the divestiture. Since the announcement, Entravision stock has gained about 11 percent. Last week it was trading in the $7.50 range.


“We view Entravision shares as a bargain at current levels,” wrote Lloyd Walmsley, an analyst at Thomas Weisel Partners, in a report following the announcement. He maintains an “overweight” rating on the stock with a 12-month price target of $12 per share.


John Klim, a Credit Suisse analyst, rates the stock “outperform” with a 12-month target price of $11 per share.


Both analysts calculate that the sale of the outdoor division would represent a financial loss for the company. Entravision got into outdoor advertising back in 2000 when it made a $462 million purchase of Z-Spanish Media, which owned 33 radio stations and about 10,000 billboards in New York and Los Angeles.


Later that year, Entravision bought another 1,200 boards in New York for $168 million. It had divested several hundred billboards in the intervening time.


At the time, Ulloa called outdoor advertising “a key component of our strategy to provide advertisers with a unique multi-media platform for reaching the nation’s Hispanic population.” He said the company would “continue to search for additional acquisition opportunities, including outdoor assets.”


But Walmsley estimates the sale of Vista Media in today’s market will fetch between $77 million and $156 million. Klim goes even lower at $57 million. In other words, even the highest estimate wouldn’t cover the original purchase price for a fraction of Entravision’s billboards.


However, the sale would benefit Entravision’s balance sheet. The company’s outdoor division has an operating profit margin of 13 percent for the first nine months of 2007, according to Walmsley. That’s significantly lower than the margins for Entravision’s holdings in television (44 percent) and radio (38 percent).


Walmsley figures once Entravision sells off Vista, the overall profit margin for the entire company will jump nearly 10 percentage points from a current estimate of 35 percent to a revised estimate of 44 percent.


Entravision’s operating margin of 13 percent looks low compared to an outdoor industry average of 32 percent. The difference “makes a compelling case for the business to be sold to a national operator,” said Walmsley.



New direction


Entravision did not respond to repeated requests for interviews, but its latest annual report outlines the company’s plans.


“We seek to build television and radio media clusters in major, fast-growing and high-density U.S. Hispanic markets,” according to the report. The ideal cluster would have TV affiliates of Univision and Telefutura, which is Univision’s sister network and targets young Hispanics. There would also be a group of radio stations.


The company’s strategy includes selling non-core assets and using the money to build clusters. Last year Entravision sold radio stations in Dallas and San Francisco because it couldn’t build a cluster of TV stations in those markets. The proceeds helped pay for the company’s recent purchase of an FM station in Orlando, where it already owned three TV stations.


Entravision appears to be concentrating on high-growth areas.


“The company has consistently outgrown the industry on the top line in both its radio and TV businesses,” Walmsley said.


“Entravision wants to spend its manpower on TV and radio, where it still does well compared to English-language media,” Newman-Carrasco said.

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