Televisa holds its own

For a company that has seen its New York stock price plummet from $70 to $12 in the space of a year, Televisa is a conglomerate with a remarkably bright future.

Latin America’s pre-eminent media company, recording sales last year of $1.9 billion, Televisa caused quite a stir on Wall Street this winter. Because the stock took such a beating, many investors wanted to know why brokers recommended it so strongly.

The answer, analysts replied, is quite simple. Almost no one had predicted such a large devaluation in the peso (50% through mid-March) or the drawn-out uncertainty that has followed. Moreover, Televisa is a very big fish in a large – and growing – pond.

In a market of 15 million TV homes, Televisa’s four national networks claim a broadcast audience share that regularly averages 80% or more. In a country of 88 million consumers, two-thirds of all ad spending winds up in the company’s coffers – either through TV, pay TV, radio, billboards or a gamut of newspapers and magazines.

Mexican ad spending grew from $250 million in 1989 to $1.85 billion in 1994 and once the economy gets back on the growth track (which, admittedly, may take a year or so, most analysts concur), spending is expected to rise much further.

For the time being however, Televisa CEO Emilio Azcarraga is having to tighten his corporate belt to get the firm into shape for the time when consumer confidence returns. To date, 10% of the company’s 23,000-strong work force has been laid off, and up to 5% more may follow. Acting schools, at least one (small) production facility and loss-making publications all have been closed. Producers are under orders to work with tighter budgets.

Now there is also a two-year program to reduce the company’s dollar-denominated costs, which currently make up 29% of total costs. Televisa will buy less foreign programming and cut its U.S. publishing costs in an effort to get the proportion down to 20%, says Niraj Gupta, senior media analyst with Nomura Securities.

But the austerity program has been made easier by two fortuitous measures taken last year. Last summer the company took out the biggest private bank loan in Mexico’s history, then valued at $1 billion. Before the devaluation, Televisa used a chunk of that cash to convert much of its dollar-denominated debt to peso debt, so fourth-quarter net foreign exchange losses were kept to a relatively light $94 million.

“Either they’re exceptionally smart or they were tipped off- either way it gives you confidence in the management,” says Jessica Reif, senior media analyst at Merrill Lynch.

Then in October, just before third-quarter earnings were released, Televisa stock took a tumble when Goldman, Sachs – the New York house that’s closest to the company – published very bearish estimates of earnings. Insiders say the report sent a jolt through the company’s upper echelons: costs were bloated, execs realized. A diet was in order. By Dec. 20, when the peso began to tip over the precipice, Televisa already was handing out the pink slips.

One analyst expects Televisa’s 1995 revenue to total 6.9 billion pesos (about $1 billion at the current rate), which is a nominal climb on 1994 but a real-terms decline of 30% (given expected inflation of 50% or so). Another forecasts revenue of $1.2 billion, or a real decline of 15%.

Profit estimates vary between $80 million and twice that – either way a decline in dollar terms. Whichever proves closest however, the figure will leap up by about $200 million if the planned sale of 49% of Televisa’s pay TV system Cablevision to monopolistic telco Telmex goes through.

Another unpredictable factor is rival broadcaster TV Azteca, which has gone through more programming changes since last summer than anyone can count. After an initial jump following the company’s privatization in mid-1993, audience share has wobbled at between 12%-15% for more than a year.

By gradual degrees the company has nibbled away at Televisa’s ad share. There were signs of this last summer when Televisa sales during the World Cup didn’t quite meet expectations, while Azteca reaped a windfall of $45 million.

During the fall pre-sale (upfront advertising) season, Azteca made a greater mark. Because it’s not a listed company, it’s hard to verify Azteca’s claimed pre-sale scoop of $150 million, but lower-than-expected pre-sales by Televisa suggest the competitor did indeed do well.

The Azteca option, coupled with a nationwide shortness of cash, could spell trouble for Televisa’s up-front sales this fall, says Shayne McGuire, an analyst with Barings Securities in Mexico City.

“Most companies don’t have the liquidity to make advance payments,” he says, though he acknowledges upfront payments offer the advantage of a hedge against further inflation in 1996.

Altogether, especially through cost containment policies, 1995 will be a tough year but not a lost year for Televisa, says Nomura’s Gupta. “In years to come we’ll see significant margin expansion and cash-flow growth,” he adds.

There may even be bright spots. Programming exports, which shot up in 1994 to account for nearly 10% of TV revenues, likely will break the $100 million mark this year. Satellite news network ECO is being redrawn for greater international appeal and may enter image-sharing agreements with CNN and European news services.

A co-production deal with Fox has yielded its first English-language fruit, a soap called “The Crystal Empire.” It likely will air on the FX channel in late spring and should be followed by further joint programming.

If the pay-TV deal goes through with Telmex, the seeds will be sown for substantial subscriber growth in the mid-to long-term. And another, more ambitious pay-TV scheme waits in the wings: pan-regional direct-to-home service Galavision DTH.

Slated to launch in early 1996, Galavision DTH is a project of satellite network PanAmSat, in which Televisa has a 50% stake and for which it will provide programming. The service will go head-to-head with Hughes Communications’ DirecTv Latin America for a market whose growth potential PanAmSat president Fred Landman puts at 4 million to 8 million subscribers over the next five years.

“PanAmSat is a very good long-term business,” Merrill Lynch’s Reif says. “It’s expensive to begin with but once you’ve broken even you’re basically making money hand over fist.”

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