A long-running feud between Univision Communications and the Mexican broadcaster that provides most of its programming is headed for a showdown in a federal court in Los Angeles. If Univision loses, it could see many of its prime-time shows yanked.
While a dispute over royalty payments is the source of the current dispute, tensions between the two companies date back to bad blood between Univision's former chief, A. Jerrold Perenchio, and the late Emilio Azcarraga Milmo, who felt he got a bad deal in 1992 when the two men negotiated the original contract. If the Mexican company, Grupo Televisa, wins and pulls its programming, Univision's enterprise value could be chopped by more than $1 billion.
The lawsuit centers on a program license agreement, or PLA, between Televisa, the dominant broadcaster in Mexico, and L.A.'s Univision, the dominant Spanish-language TV network in the U.S. and owner of KMEX-TV (Channel 34) in Westchester. The agreement gives Univision the exclusive right to air Televisa shows in the United States.
If Televisa were allowed to pull its popular Spanish-language telenovela programs from Univision, the company says it could sell the shows to other groups for much more money.
Currently, Televisa supplies Univision with about 15 hours of prime-time shows each week. Advertising on those programs account for about 40 percent of Univision's revenues, according to Julio Rumbaut, a Miami-based TV consultant.
Under the programming agreement, Univision must pay royalties of 9 percent on advertising sold during Televisa programming. But some time around 2004, Univision changed the way it calculates those royalties, resulting in much lower payments. Also, Univision sued Televisa for $118 million in refunds, claiming the new calculations were retroactive.
Televisa countered, claiming Univision had "materially breached" its agreement, thus voiding the contract, which was scheduled to continue until 2017. That countersuit plus rounds of supplementary charges on both sides is scheduled for trial April 29 in federal court.
The companies still deal with each other on a daily basis and Televisa continues to provide Univision with programming at least for now.
"The jury will decide if the breaches are material," said Marshall Grossman, an attorney with Bingham McCutchen who represents Televisa. If so, "then Televisa will have the option to terminate the contract. This is a powerful and rarely used procedure, but we have invoked it here and we are dead serious about it."
However, Univision general counsel Doug Kranwinkle said there's no basis for a finding of a material breach. Since the litigation started, Univision has paid approximately $20 million of the disputed amount under protest to Televisa. So even if the jury rules in favor of Televisa, it presumably could keep that money, the payments would be up to date and the contract still valid.
"We are asking the court to enter a judgment that returns to Univision the money it paid under protest," Kranwinkle said. "We believe we are not in breach of the PLA, period. But if the jury disagrees and says that we have committed breaches, it also should find that we have cured them."
Kranwinkle confirmed that Univision plans to continue the contract until 2017.
Rumbaut believes that the dispute over the royalty payments is a way for Televisa to try to reach its real goal of ending the exclusivity agreement with Univision.
"Televisa officials have publicly stated that they feel the PLA undervalues their programs," the consultant said.
The lawsuit also alleges that Univision has violated copyright by altering Televisa's programs and has failed to allow independent auditors to examine its books as required under the contract.
"They're getting paid too little because they're getting shortchanged," said Grossman, the Televisa lawyer.
He points to the $20 million that Univision has paid under protest as what he calls evidence of creative accounting.
"Since this suit was filed, Univision has paid more than $20 million that it had not properly accounted for prior to the filing of suit. That's not exactly chump change."
Grossman believes the trial will last four to five weeks and feature "an interesting group of witnesses" that will include top executives from both companies.
The trial's outcome could have repercussions across the U.S. Hispanic advertising industry a sector where Univision plays a dominant role. The company "stands in a league of its own," as stated in a report from multicultural ad agency Tapestry.
Rumbaut believes that if Univision loses the exclusivity agreement, other Spanish-language broadcasters would bid up the price of Televisa shows.
"Televisa would have a huge bargaining chip with Univision, Telemundo, digital channels or any other competitor," he said.
The lawsuit is the latest chapter in a long history of battles between the two companies.
Univision started as the brainchild of Televisa Chairman Emilio Azcarraga Milmo, who in the early 1960s loaned money to U.S. citizens so they could buy TV stations in Latino cities and fill the air with Televisa programs. After the experiment proved an economic success, the U.S. government determined that the U.S. citizens were merely a front for the Mexican company, since foreigners cannot own U.S. broadcast stations. As a result, the Federal Communications Commission ordered a divestiture in 1986.
Hallmark Cards Inc. of Kansas City, Mo., bought the stations and network in 1988 and renamed the operation Univision. In 1992, Hallmark sold it to a group composed of Mexico's Televisa, Venezuela's Venevision and Hollywood producer A. Jerrold Perenchio. The arrangement was allowed because the foreigners owned minority stakes.
Perenchio negotiated the PLA with Azcarraga, who felt he got a bad deal. Azcarraga died in 1997, but his son, Emilio Azcarraga Jean, the current chairman of Televisa, still has hard feelings.
"There's an emotional thing," said Rumbaut. "He feels Perenchio screwed his dad."
As Univision's revenues climbed, tensions mounted, occasionally resulting in legal actions or amendments to the PLA. But Perenchio, who never granted an interview or allowed a photographer to take his picture during his Univision tenure, managed to maintain the deal.
Then in 2006, Perenchio announced his intention to sell Univision. The company was eventually acquired for $13.7 billion by a consortium of investors headed by L.A. entrepreneur Haim Saban.
The decision marked an escalation of hostilities, according to a memorandum filed by Univision with the court.
"As a bidder for Univision and an insider within Univision, Televisa had an obvious motive to drive down the price. It asserted its audit rights and began raising with Univision every issue it could identify," the memo stated. "When Televisa was outbid and another group bought Univision, it persisted in its efforts to disavow its long-term contractual commitments to Univision, in order either to stick up Univision's new owners or to pull the plug on Univision and run to a competitor with its programming."
Grossman called Univision's argument "nonsensical," noting that the original lawsuit was filed in May 2005, nearly a year before Univision put itself up for sale.
The Saban group bought the company with full knowledge of the legal entanglement. But its investment now stands at significant risk. Based on financial ratios used by the Saban group, Rumbaut calculates that a Televisa program blackout would reduce Univision's enterprise value by as much as $1.4 billion. (Univision is a private company, so its total value is not known, other than its purchase price of $13.7 billion two years ago.)
Of course, Univision could replace the programming, but it presumably would cost more and the popularity of new programs is unknowable.
If Univision has a backup plan, it is not clear, Rumbaut said. And while the network produces news, and game and award shows, it has little history with dramatic fare. So far, Univision has produced just one prime time show a weekly version of ABC's "Desperate Housewives" but that departs from the norm in Spanish-language TV, where the same shows run in the same time slots five nights each week.
Although contract disputes often settle out of court, both sides seem determined to go the distance in the Televisa-Univision spat.
"There have been settlement discussions, but they have not proven fruitful," Grossman concluded. "My expectation is that this case will go to trial and will be decided by six individuals in the jury box."
Editor's note: Reporter Joel Russell appears regularly on a KMEX-TV news broadcast as an unpaid commentator. Neither he nor the Business Journal has any other relationship with Univision or Grupo Televisa.
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