High-stakes talks between Univision Communications Inc. and the company that provides its most important programming have collapsed, and for now the two sides appear headed to court.

A longstanding lawsuit pits Grupo Televisa, the Mexico City-based behemoth of Spanish-language media, against L.A.'s Univision, the dominant Spanish-language broadcaster in the United States. Univision was a public company until April 2007, when a consortium of investors led by Los Angeles billionaire Haim Saban took it private.

At issue is the amount of money Univision pays Televisa for programs, especially the telenovelas that fill 15 primetime hours on Univision's schedule each week. Univision contends it has overpaid for programming and deserves a refund, while Televisa alleges that Univision has so violated the terms of the contract that a jury should void it. That's important because if Televisa wins, it could yank the most important programs from Univision.

The lawsuit was slated to go to trial last April 29 in a Los Angeles federal courtroom. But the day before the trial, both sides requested time to seek an out-of-court settlement.

The Business Journal has learned that the warring companies were negotiating about forming a joint-venture company that could have bridged their differences. But last month those talks were ended.

A deterioration of the advertising market has only wedged the parties further apart, according to sources familiar with the negotiations.

"The economy has changed so dramatically that Televisa is not going to bail out the current owners of Univision from what, in retrospect, appears an ill-conceived investment," said Marshall Grossman, a Santa Monica-based attorney with Bingham McCutchen LLP, who represents Televisa. "If they want to go to Washington, D.C., (for a bailout) that's their decision, but they won't be getting any help from Mexico City."

Both sides agree that the positions are so far apart, it appears the case will finally go before a jury on its new date, Jan. 6.

"We could go to trial five years from now, and the chances of a settlement would still be at the low end of the scale, I would say less than 5 percent," Grossman emphasized.

Both sides also insisted there would be no settlement before the April date, however.

Univision executives last week declined to discuss the case with the Business Journal, but a spokeswoman for the network issued a statement.

"The facts are on our side and we are confident that Univision will prevail at trial once we present our case in January," the statement said.

Ad swoon

Data from TNS Media Intelligence shows that during the first half of 2008, ad spending on Spanish-language TV declined 0.1 percent. However, that's in contrast with consistent double-digit gains just a few years ago. More ominously, the downward trend has accelerated as the year progressed, with large cutbacks in automotive, consumer goods and telecom three categories that advertise heavily to Hispanics.

"Advertising expenditures started to contract in March, well before the September turbulence on Wall Street renewed concerns about the health of the economy and possible collateral damage to the ad market," said Jon Swallen, senior vice president of research at TNS.

Times were different when Saban formed Broadcast Media Partners in 2006 to buy Univision. Saban paid $12.3 billion, or 12.5 times earnings for the network. TV properties usually command six to nine times earnings.

"That was the high-water mark for this latest round of leveraged buyouts in the media sector," said David Joyce, an analyst at Miller Tabak in New York who covered Univision until its sale. "Now the problem is the appraisal value of Univision stock. Univision is suffering from a poor advertising market."

Numbers from Univision's final filing before going private confirm the importance of the Televisa contract.

Julio Rumbaut, a Miami-based consultant specializing in Hispanic media, said Univision's revenues for 2007 totaled almost $2.1 billion, of which $517 million was connected to advertising on Televisa shows. Univision paid $138 million for those shows, giving the network a profit margin of 73 percent, compared with an industry norm around 40 percent.

Univision's U.S.-produced content mostly game and talk shows, and newscasts yielded a 22 percent profit margin. Those numbers show Univision would face lower profits if it paid higher prices for Televisa programming or had to replace it.

A person familiar with the negotiations said Televisa wanted an equity stake in Univision that would give it a voice in management. Univision refused.

That led the two sides to consider formation of a new company that Televisa and Univision could co-own.

"The parties have never been close to forming a new entity," said Grossman. "I can't get into the back-and-forth of the discussions, but I can tell you there has been no agreement on any matter."

What ifs

Rumbaut said that if Univision prevails in the Los Angeles trial, the programming agreement will continue in effect until 2017. But if Televisa wins, Univision faces significant financial impacts that have been estimated as high as $1 billion. However, Univision would appeal the adverse ruling and tie the case up in court for two more years.

If Televisa ultimately wins the case, Univision would have to produce original programming at higher cost.

"There's no immediate danger that Univision will lose its programming, but for a business that depends on foreign programming it's an uncertain issue that's out there," Rumbaut said.

The outcome could also affect Los Angeles-based Entravision Communications Inc., which owns 32 Univision affiliate stations around the country.

"Part of Entravision's stock downdraft has been related to concerns that if Univision loses the programming agreement, Televisa's content would go to another network," said Joyce, the analyst at Miller Tabak. Entravision could benefit from the preservation of the status quo.

For now, Univision enjoys a competitive advantage "unparalleled anywhere else in the word," Rumbaut said. Televisa's shows are made inexpensively in Mexico, while Univision charges advertisers in U.S. dollars. "The mass migration of Mexican nationals to the U.S. over the past few decades has made this possible."

Note: Joel Russell appears weekly on KMEX (Channel 34), Univision's Los Angeles station. He does so as a Business Journal reporter and is not employed by Univision.

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