What the Televisa, Univision deal means

Ex-enemies solidify hold on U.S. Spanish-language market

Rife with betrayal, relationships gone bad and court battles, the decades-long relationship between Mexican broadcaster Grupo Televisa and U.S. Spanish-language media firm Univision Communications has played out with all the melodrama found in their hit telenovelas.

But a deal unveiled Tuesday between the largest Spanish-language media firm in the world and the largest in the U.S. seems to put the legal wrangling solidly behind them, align their interests and signal a new era of collaboration.

Televisa will make its comeback as a Univision investor, paying $130 million to buy a 5% stake. Univision will issue new shares in the deal, which will slightly dilute the stakes of its current investors.

As part of an overall $1.2 billion investment, Televisa also will get the option to raise its stake to 10% after three years and hold debt that is convertible into an additional 30% stake in Univision. Current U.S. media-ownership rules, however, allow a foreign company to own only as much as 25% in a U.S. broadcaster.

Indebted Univision will get more financial freedom and extended and expanded programming rights, and Televisa gets higher royalty fees and a strengthened position in the U.S., the world's second-largest Hispanic market.

Markets seemed to love the happy turn, bidding up Televisa shares more than on any day in almost two years.

"I think there's a change (of attitude) and this reflects that," Santander analyst Gregorio Tomassi said from Mexico City. "It's a very intelligent deal."

The new program-license agreement that Univision gets from its largest content supplier will include Internet and mobile U.S. rights in addition to broadcast rights. The deal also will cover key Mexican soccer rights starting next year. It will run through at least 2020, or 2025 if certain conditions are met; their previous deal was set to expire in 2017.

The companies have been embroiled in long-running litigation over digital rights. Sources said Tuesday's deal effectively takes those issues off the table.

Under the expanded content arrangement, Televisa will get additional license-fee payments estimated at about $50 million in the first year.

Televisa also will contribute its 50% interest, valued at $55 million, in the two firms' cable network programming joint venture TuTV.

The investment is unusual in that it includes an equity and debt portion. And significantly, three Televisa representatives will join an expanded 20-member board of Univision.

For Televisa, the move means a stronger presence in the U.S. Hispanic media market and a way to benefit from what the company said it expects will be continued growth here. Televisa has been looking to grow outside its home market and recently unveiled a deal with Lionsgate to distribute movies for Spanish-language audiences in the U.S.

When Univision was on the auction block in 2006, Televisa tried to acquire it, leading a group that included Bill Gates' private-equity firm Cascade Investments and Bain Capital.

Televisa at the time owned an 11% stake in Univision, but its bid was lower and edged out by the competition. So Univision ended up being taken private by the current owner group led by Haim Saban's Saban Capital Group and private-equity firms Madison Dearborn Partners, Providence Equity Partners, Thomas H. Lee Partners and TPG Capital.

Televisa was not happy with that scenario, prompting it to sell its stake in Univision in 2007 for $1.09 billion.

The battle between the two companies is part family feud. In May 2005, Televisa CEO Emilio Azcarraga Jean resigned from Univision's board, citing concerns about royalty payments and Univision's succession plan after former chairman Jerrold Perenchio had stepped down. Televisa made no secret of its opposition to the appointment of president and COO Ray Rodriguez, who since has retired.

At one point, Televisa even prohibited its contracted talent from appearing on Univision shows and specials, putting the latter in a difficult position as some of its programs relied on appearances from Televisa stars.

The conflict came to another boil several years later, when Televisa said it was taking Univision to court for alleged breach of contract; Televisa was seeking to sever its long-term programming pact with its stateside partner. Adding insult to injury, Televisa inked a deal with Univision rival Telemundo in March 2008 to distribute its content across multiple platforms in Mexico.

But the new owners of Univision, led by chairman Haim Saban and CEO Joe Uva, started working on a rapprochement.

Saban and Televisa deal man and executive vp Alfonso de Angoitia developed a good working relationship and were the lead negotiators on Tuesday's deal, according to a source.

In January 2009, Televisa and Univision reached a settlement over royalty payments.

The content-rights disagreements had major implications for the Spanish-language media titans as both lean heavily on the programming arrangement. Televisa supplies Univision with a bulk of its primetime content, including its telenovelas, which always have been a strong ratings draw, even though Univision also has started producing its own content.

Azcarraga Jean on Tuesday called the deal with Univision "a highly attractive strategic platform for the continued distribution of our content in the U.S. marketplace, our most important media marketplace outside of Mexico."

Saban said the agreement "fully aligns the interests of Univision and Televisa for the long term as both companies work to further serve the substantial growth opportunities in Spanish-language media in the United States."

And Uva told The Hollywood Reporter: "There is intrinsic value in these two companies working much more closely going into the future, particularly as it relates to how do we best service the needs and interests of the U.S. Hispanic community."

Standard & Poor's credit analyst Heather Goodchild said that for Univision, the deal "alleviates risks surrounding the company's advantageous contract with Televisa, which we believe supports its strong audience ratings, revenue and high [operating cash flow] margins."

She added that higher royalty payments "could be more than offset by the potential digital revenues." Plus, securing long-term content from Televisa also could reduce Univision's "need to invest in in-house programming capabilities, which we regard as having uncertain returns."

The Univision network reached a ratings milestone during a week at summer's end when it beat the English-language broadcast networks among adults 18-49.

Its often youthful audience is likely to continue growing as Hispanics are expected to again be the fastest-growing demographic group in this year's U.S. census.

For last week, Univision was the No. 5 broadcast network -- beating the CW -- in overall primetime among total viewers, where it averaged 4 million, and adults 18-49 (2.2 million).

Barclays Capital analyst Michel Morin estimates that Televisa could receive about $450 million in royalties from the new arrangement in 2017, up from $150 million in 2010 and his previous 2017 estimate of $250 million.

The companies expect the deal to close during the first half of 2011. Wall Street cheered it, driving up Televisa shares 13.7% to $21.51. Entravision Communications, the largest TV station group of Univision and Telefutura affiliates, also saw its shares jump 10.4% to $2.12.
Univision is privately held.

One issue that concerned some on Wall Street was how the companies came up with the price tag for the deal, which implies an equity value of $2.6 billion for Univision. The company went for $12.3 billion plus $1.4 billion in debt in its buyout several years ago.

Observers said the extended Televisa-Univision relationship could be seen as a negative for NBC Universal's Telemundo, Univision's main U.S. rival.

Georg Szalai reported from New York; John Hecht reported from Mexico City.