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Two media powerhouses said "no gracias " to one of America's biggest broadcasters. Here's why regular investors might say "sí."
CBS and Time Warner kicked the tires of U.S. Spanish-language network Univision several months ago but decided to pass. According to people familiar with the matter, the two giants had only brief discussions with Univision and didn't pursue meetings with the network when it tried to restart conversations a few weeks ago. All three companies declined to comment.
Why did the potential suitors zone out? Even if a fair price could be negotiated, Univision would remain closely intertwined with Mexican media conglomerate Grupo Televisa, which trades in New York. Televisa acquired a roughly 37 percent stake in Univision in 2010 when a massive debt load nearly crushed the network. In addition, Televisa has negotiated a content-sharing deal that gives it a big chunk of Univision's revenue even if it sells the equity stake. Televisa currently receives about 12 percent of Univision's gross revenue and its take will rise to about 16 percent in 2018.
Big media companies have plenty of expertise in sourcing content and therefore would be reluctant to give up so much revenue in exchange for Televisa's material, people familiar with the matter said.
Fortunately, there's another way to unlock value from Univision that could benefit Televisa and any investor who owns its shares. Univision's other owners, which include a group of private-equity firms that invested near the top of the market in 2006, are likely to seek an exit sooner rather than later. Univision wants to pursue an initial public offering in the next year or two if it doesn't find a strategic buyer, according to a person familiar with the matter.
That would be a positive outcome for Televisa, even if it didn't sell a single share. Public markets would put a price tag on Univision's equity, potentially revealing that the investment is worth more than it gets credit for currently.
Indeed, Univision holds unique assets that could help it command a lofty valuation as a public company. Univision's flagship broadcast network is far and away the largest Spanish language channel in the U.S. It has averaged 3 million viewers in prime time so far in the broadcast season that began last September, according to Nielsen. That compares with 1.3 million viewers for second-place Telemundo, which is owned by Comcast's NBCUniversal, the parent of CNBC.
And while broadcast viewership has stopped growing, Univision is still one of the few places where advertisers can find a very large Spanish-speaking audience. Hispanics as a whole account for about 13 percent of total television viewing in the U.S. but only 4 percent of advertising dollars, estimates John Tinker, an analyst with Maxim Group. That imbalance should correct, especially as the number of wealthy Spanish-speaking Americans increases.
Univision should also continue collecting so-called retransmission fees from cable and satellite companies that carry its network, a strategy that has generated massive profits for broadcasters. CBS, for instance, expects to generate $2 billion in annual retransmission fees by 2020. Even a fraction of that amount would be meaningful for Univision, which had $1.1 billion in adjusted operating profit in 2013.
Televisa's revenue-sharing deal is icing on the cake. The 16 percent of Univsion's revenues that Televisa will collect from 2018 and onwards are virtually pure profit. Taking that into consideration, Televisa's 37 percent stake could be viewed as a much higher level—well north of 50 percent. Televisa spokesman Alejandro Olmos didn't respond to requests from CNBC for comment.
Investors will also find plenty of value in Televisa's other assets back home in Mexico. The majority of the company's revenue comes from content, which is mainly advertising sales from its highly dominant broadcast networks. With very little competition, the company has been able to steadily increase advertising revenue over the last several years even with only modest economic growth.
Of course, there's a potential for new players to come into the game as the government plans to grant a couple of new broadcast licenses. But curating a brand new broadcast network is no easy task even for a deep-pocketed player. It could take years for a new rival to make a dent in Televisa's position.
And Televisa could see benefits of its own if the government steps up efforts to level the media playing field. The company owns a 50 percent stake in Iusacell, which has a mere 8 percent share of the Mexican wireless market and remains profitless. The dominant player with a roughly 70 percent share is Telcel, a unit of Carlos Slim's America Movil. The hope is that the government forces Slim to give up subscribers, many of which would fall into Iusacell's lap. America Movil spokesman Araceli Ruiz Vazquez didn't respond to a request for comment from CNBC.
Televisa has an enterprise value including net debt of $22 billion, or 9.4 times 2014 consensus earnings before interest, taxes, depreciation and amortization. That looks reasonable, given analysts expect high single-digit EBITDA growth over the next several years.
But there is room for the stock to rise if Televisa gets more credit for the value of Univision, whether it decides to keep its stake or not. Maxim Group's Tinker estimates Univision accounts for about a third of Televisa's enterprise value, suggesting it could have a big impact on the Mexican company's shares. With a likely IPO around the corner, Televisa's next plot line could be a real crowd pleaser.
—By CNBC's John Jannarone