Univision Communications Inc., fresh from a high-stakes settlement in which it won command of its most important programs, now must pay higher rates for those shows at the same time it is seeing a decrease in revenues and faces big debt payments.
It’s adding up to trouble for the Spanish-language broadcaster, which recently laid off a significant number of workers. Lately, the company’s bonds have been trading at prebankruptcy prices.
The pressure on the L.A. private company follows its January settlement with Televisa, a Mexican media conglomerate that supplies about 40 percent of Univision’s shows. The agreement, reached during a federal court trial of Televisa’s suit over its contract, gave the broadcaster exclusive rights to Televisa programs through 2017.
That gave Univision important programs, but under the new agreement, it will pay higher royalties for them. The specific rate hikes were sealed; the broadcaster even got special permission from the Securities and Exchange Commission to keep the settlement terms secret. But the payments are significant: In the last fiscal year, Univision paid Televisa $130 million in royalties. The settlement also calls for the broadcaster to give its program supplier $65 million in free ads every year, which could crowd out paying advertisers.
But the larger challenge to Univision’s financial health stems from the 2007 acquisition of the company by a group of private equity investors led by L.A. billionaire Haim Saban.
The buyers paid $12.3 billion for the broadcaster. They financed the deal with a relatively small amount of cash and issued $10.7 billion in publicly traded bonds. One analyst at Standard & Poor’s called the debt “an extremely onerous burden” on the company; Univision bonds last week traded for about 9 cents on the dollar.
“When a bond trades at nine cents, the market is anticipating a bankruptcy filing,” said Harlan Platt, a finance professor at Northeastern University in Boston. “All media companies have suffered a startling decline in advertising revenues, and I suspect that Spanish-language stations are no different.”
However, a media expert familiar with Univision said he expects no bankruptcy soon.
“Univision is not going bankrupt in the short term,” said Julio Rumbaut, a broadcast media consultant in Miami.
‘Ample liquidity’
“Univision has more than ample liquidity to operate the business in the current environment, and has sufficient cash on hand to meet all obligations and debt maturities, including repayment of the asset sale bridge due in March 2009,” according to a statement Univision provided to the Business Journal for this article.
Univision executives declined further comment.
Rumbaut, however, said the longer term may pose a problem as bond payments come due. A $500 million payment is due later this month, but the company already made a partial payment after selling its music and publishing divisions in May 2008.
Another $500 million will come due in 2011, followed by a massive $8.2 billion payout in 2014. According to one source who declined to be identified, either milestone could trigger a bankruptcy unless Univision can refinance the debt.
But refinancing would appear to be difficult, given the deterioration in the company’s value. The situation would be similar to a homeowner who wants to renegotiate a $1 million mortgage on a house that’s now worth $800,000.
In its latest filing with the SEC for third quarter 2008, Univision took a $3.7 billion impairment charge “due to the adverse market conditions affecting the company and lower trading multiples.”
The Univision purchase is somewhat similar to another L.A. media buyout that resulted in Chapter 11 bankruptcy the purchase of Los Angeles Times parent Tribune Co. by Sam Zell. Both acquisitions were highly leveraged and bought before the collapse of the ad market.
Based on filings, Univision, which is the country’s largest Spanish-language broadcaster, reported revenue in the first three quarters of ’08 that was 8 percent lower than in the same time the previous year. That contrasts with annual double-digit revenue growth during the four years before the acquisition.
In the third quarter filing, the company blamed “reduced spending on advertising as a result of the downturn in the economy.”
The fourth quarter filing has not been made, yet, but there’s little indication that the situation has improved. In fact, Univision laid off 300 employees, or 6 percent of its work force, on Feb. 27, citing “downward pressure on advertising-related businesses.”
Rumbaut said shrinking revenue at the company is a problem because it makes debt service more difficult and refinancing more challenging.
Dear price
At the time of the acquisition, the buyers paid about 5.7 times revenue for Univision. By most measures, that’s a high price.
“Valuation multiples of companies that were merged or acquired in 2008 declined from 2.3 times revenue in 2006 to 1.7 times in 2008, a level consistent with historical valuations in the (media) industry,” stated a report from merger consulting firm Berkery Noyes in New York.
Univision’s money problems also are taking a toll on the company’s ability to produce new shows, which are expensive and risky propositions.
As a result, the broadcaster remains dependent on Televisa for programming. The Mexico City-based media company provides most of Univision’s popular fare: the soap opera-style telenovelas.
“Univision hasn’t produced any strong telenovelas,” Rumbaut said.
Staff reporter Joel Russell appears on Univision’s KMEX-TV (Channel 34) to discuss articles that were published in the Business Journal. He is not paid by Univision. There are no other ties between Univision and the Business Journal.
