Does Televisa + Univision = Television.

The month of April may portend a revolutionary or at least an evolutionary change in the landscape and structure of the US Spanish language television industry.

Barring an unlikely settlement or a request for extension of the scheduled court date on April 29th, Grupo Televisa, the Mexican based multimedia and entertainment company and world’s largest producer of Spanish language television will have its day in court regarding its former partner Univision, the leading Spanish language media company in the US.

Televisa is attempting to earn the right to end an agreement – the Programming License Agreement “PLA” – reached in 1992 between Emilio Azcarraga Milmo (the late father of current Televisa Chairman and CEO Emilio Azcarraga Jean) with recently retired Univision Chairman Jerold Perenchio by claiming that Univision materially breached its obligations under the PLA and acted in bad faith.

The PLA gives Univision exclusive use of Televisa’s popular shows in the US until the year 2017. Many industry analysts consider the PLA the heart and soul of Univision’s ability to consistently deliver eye balls and a predominant part of its value.

Televisa has publicly stated that the agreement is unfair and doesn’t pay the Mexican company for the full value of its programming. Televisa’s original law suit against Univision sought repayment of $118 million in copyright royalties it claimed Univision owed under the PLA. However, Televisa later amended its complaint to seek a ruling that Univision material breach of the PLA which, if granted, would permit Televisa to terminate the PLA.

Recently, US District Court Judge Philip S. Gutierrez in Los Angeles denied Univision’s request to dismiss the material breach claim made by Televisa in the 2-year-old lawsuit. The judge said there was enough evidence for a jury to decide whether Univision acted in “bad faith” when dealing with its Mexican partner and thereby decide whether Univision was in material breach and whether Televisa would have the right to terminate the PLA.

Also up for grabs are the rights to Televisa’s new media content, such as internet-delivered content, as the agreement was signed prior to the advent of new media vehicles and simply does not address PLA issues within this context.

Let’s look at the impact of the present agreement on Univision, Televisa and the rest of the Spanish language television industry and at the potential changes if Televisa was to prevail.

Televisa’s programming generates about 40% of Univision’s revenue. Moreover, Univision airs Televisa produced soap operas on a strip programming schedule, Monday thru Friday schedule for 15 of its 20 weekday prime time hours.

This unique programming grid is what differentiates Univision’s audience flow and economics from general market television and even from other Spanish language networks in the US.

For instance, Univision’s PLA with Televisa provides the former with the right to air popular Televisa programming on a prime time Monday through Friday strip with an additional right to re-air such content six months after its original US broadcast. Moreover, the PLA allows Univision to air Televisa programming on the Univision’s various network platforms – the “counter-programmed” Telefutura network and the Galavision cable network.

A potential loss of Televisa’s programming could have a dramatic impact on Univision’s enterprise value. Using a back of the envelope calculation, in 2007 the three networks which rely in Televisa’s programming; Univision, Telefutura and Galavision had gross revenues of $1.6 billion. Any effect on the 40% of the revenue attributed to Televisa and using Univision’s 40% margin yields a potential EBIDTA loss of $128 million or at the 14 times EBIDTA multiple paid by the private equity consortium a net loss of at least $1.4 billion in enterprise value.

Of course, it is not a zero sum game and Univision would replace Televisa’s programming and not all the revenue would be lost, but the replacement programming would come at significantly higher costs than the present Televisa deal, hence potentially affecting margins and enterprise value even further.

Hence, despite its substantial asset base of television and radio stations and the US Hispanic market’s most visited web portal, Univision could lose substantial value if Televisa were to take its programming elsewhere at the end of a legal appeal process.

Telemundo produces its own original programming for prime time and other day parts and TV Azteca, the only other player in the Mexican television duopoly market owns and operates its own US network, Azteca America, and feeds all of its Mexico produced programming exclusively to its US network.

In spite of the tense relationships between Televisa and Univision and the pending law suit, a consortium of five of the world’s largest private equity funds outbid Televisa and its US partners and paid $13.7 billion to acquire Univision in 2007.

Televisa sold its shares in Univision which also ended another agreement, known as the Participation Agreement which required Televisa and Univision to carry out joint vs. sole media ventures in the US.

Univision’s new owners and executives have tried to coax day long Televisa and it’s Chairman, Emilio Azcarraga Jean, back to the negotiating table but has been unsuccessful to date.

According to other industry experts and aside from its economic interests, Televisa privately admits that there is no love lost for certain executives who stayed at Univision after its sale to the consortium alluding specifically to Univision COO Ray Rodriguez, whom they apparently see as a holdover from the Perenchio administration as an impediment to any possible negotiations.

Televisa as a prevailing party could end the PLA 10 years early and then either renegotiate a new PLA and enhanced equity position with Univision, launch its own US network, sell its shows to a highest bidder (including Univision) or, more likely, use its significant content and cash currency to negotiate with Univision, Telemundo or new potential US partners like Tribune, ION and/or the myriad of burgeoning digital channels.

If that were to occur Univision’s business model would necessarily have to be altered from that of primarily a program aggregator to a program producer as no other country other than Mexico produces programming that is consistently viable to appeal to US Hispanics.

Although Univision produces a number of variety, game and talk shows – including a highly respected national newscast and a daily morning program – the majority of which were conceived and developed during the time Joaquin Blaya ran Univision, it has not successfully produced daily strip soap operas for prime time. And this is precisely the type of programming Televisa does consistently well – with the benefit of cost advantages inherent to producing using in Mexican Pesos as its currency.

Further, Televisa amortizes the programs in Mexico and garners incremental revenue in the various currencies of the hundreds of countries throughout the world in which its programming is resold.

Curiously, Univision has not began a program production laboratory for daily soaps. In contrast Telemundo is now producing four original prime time soaps in Miami, Colombia and most recently in Mexico, transforming itself into the world’s second largest producer of Spanish language programming (albeit with soaps that are unusually expensive,
even when produced in Colombia and Mexico).

Univision’s most recent production is a Spanish language adaptation of “Desperate Housewives” but only airs it on a one hour weekly basis and thus a departure from the unique programming grid strategy proprietary to US Spanish language television networks. After a healthy ratings start this show has dropped to lower ratings levels.

Televisa’s consistently popular soaps have apparently more cogent or persuasive story lines predicated on production values which do not rely on adaptations of successful US general market programs.

Let’s look at what may happen if Televisa does not prevail or if it is only awarded money damages without the right to terminate the PLA, and to do so let’s analyze Televisa as a publicly traded company.

Televisa controls approximately 70% of the Mexican terrestrial television industry, dominates the country’s satellite television market, is amassing greater market share in Mexico’s cable television sector, co-owns 50% of a Mexican radio network, and is Mexico’s largest All publisher, has publishing interests in Chile and Argentina, has recently entered the gaming industry in Mexico and has taken a 25% stake in a start-up broadcaster in Spain.

Hence, it is clear that Televisa wants and needs to grow outside of Mexico; it has proven it can monetize its content effectively in various European and Asian markets, but its primary export market is the US Hispanic market which in the last few years has led it to even entertain designs on the US general market.

Further, Televisa has struck 10 year deal with General Electric’s Telemundo unit to air Telemundo produced programming in one of Televisa’s owned Mexico outlets thereby also impeding the entry of another competitor into the Mexico market which would have a coveted content and distribution outlet ownership business model.

Thus, if Televisa does not prevail in its lawsuit, some industry experts predict that Televisa will begin to transfer parts of its production expertise into relationships with other producers outside the ambits of its how long PLA with Univision.

Clearly, Univision will then attempt to hold Televisa to the letter of the PLA for the next 10 years. But as they say, where there is a will there is a way … perhaps especially so when it comes to Televisa with its deep content expertise and widely reaching tentacles.

Nevertheless, the existing air tight Supplier-distributor model between Televisa-Univision is now more vulnerable than ever.

Hence, no matter which way the suit ends, even in the event of a negotiated settlement, we can expect either a revolutionary or an evolutionary change in the US Spanish language television landscape.

By Julio Rumbaut, President, Rumbaut & Company, Miami, Florida

Julio Rumbaut has a unique blend of operating, strategic and transactional experience in US and Latin American media and is currently CEO of Miami based media brokerage and consulting firm Rumbaut & Company.