Description

Grupo Televisa

Overview

Grupo Televisa offers an asymmetric special situation that should result in the crystallization of significant equity value over the coming 1-2 years.  It is a holding company with three primary assets: (1) its 45% equity stake in Televisa-Univision (TVU), (2) its ~85% ownership of izzi, a Mexican cable company, and (3) its 61% ownership of Sky, a satellite pay TV operator in Mexico and Central America.  It has other operating assets including Mexican soccer, casinos, and a publisher as well, but they are a minority of the business today.

It is rumored that some large holders, comprising 30% of the free float and including Harris Associates, Melinda French, and all the Gates-related entities (Cascade, the foundation) have been exiting their positions in Televisa over the last year.  I believe the persistent selling has pressured the stock to unreasonably cheap levels, offering a highly attractive skew today.

Televisa is overly complex for the size of the company ($2.5b market cap), but management and controlling stakeholders are clearly on a path to break up the holdco structure over time by executing a series of transactions: (1) merge its Mexican content operations with Univision in the US (done), (2) merge izzi with Megacable (an offer has been made), and (3) spin off its “other” businesses (announced but not yet completed).  

While SOTP situations are always dangerous, I believe it is appropriate and sensible to use one here because the company is clearly pursuing strategic actions to maximize and realize the value of each underlying business.  Reasonable valuation scenarios over the next few years suggest fair value significantly above today’s prices.  Below is my estimate of Televisa’s proportional equity value for each underlying business using conservative multiples (7x EBITDA for TVU, 6x for cable in a merger scenario, 4x for Sky.

As we can see in the table above, relative to today’s $4.50 share price, there is significant appreciation potential primarily driven by TVU and Cable.  I will focus the rest of this writeup on those two segments since they are the primary drivers of equity value.

TelevisaUnivision

Univision had been owned by a private equity consortium, initially led by Haim Saban, since 2007.  It was overly leveraged and poorly managed after several failed attempts at an IPO and/or a sale over the years.  In 2020, a consortium led by Wade Davis (former Viacom CFO) and Searchlight Partners acquired Univision.  Televisa has had a long-standing relationship with Univision and provided content under a programming license agreement (PLA) under which Univision would pay Televisa a 16.45% royalty on its revenues.  Televisa also owned 36% of Univision’s equity and rolled it into Wade Davis’ new ownership structure.  

Wade Davis injected new life and new management into Univision.  He recruited new leaders in ad sales and in streaming from Warner Media, Netflix, Disney, Sling, and other industry leaders.  His vision was to modernize and optimize the core business and to pursue a streaming strategy with Univision’s (and Televisa’s) extensive Spanish-language content library, the largest in the industry.  

To elevate his pursuits, in early 2021, Televisa and Univision announced a business combination that would merge Televisa’s Mexican media assets with Univision.  Through the transaction, Televisa would increase its ownership of Univision from 36% standalone to 45% combined (45% valued at $2.7b), while extracting $3b of cash upon closing and $300m in NPV of future cash payments, for a total of $6b of crystallized value.  The transaction attracted new capital into TVU from new and existing investors including Softbank, the Raine Group, Alphabet, and Liberty Global.  

TVU is a unique asset in the media industry.  It has dominant market share in both the US (>60% hispanic market share) and in Mexico (>60% of TV advertising revenues).  As a combined company, TVU could target the global opportunity for Spanish-language content as a single entity instead of isolating the US from everything else.  

The Spanish-speaking US population is 20% of the total population and is expected to be 50% of population growth in the US over the next 5 years.  In GDP terms, it is bigger than Spain and about the size of France.  It is also significantly underpenetrated and underserved.  TVU is the definitive market leader with about 60% of linear viewing share and regular access to 125m people every day across its video and audio assets in the US and Mexico.  This is especially important because TVU does not run a full ad load, meaning it can advertise its own products and services to its primary target market very efficiently on its own assets without sacrificing revenue or margin.  

TVU is a content producing powerhouse, with 93 studios across the US and Mexico.  It has over 300k hours of entertainment library content, multiples of other media companies, and produces over 80k hours each year.  Leveraging its extensive library of content and new content production capacity, TVU was able to launch an AVOD streaming service, Vix, and its SVOD sibling Vix+ (an app within an app) within 8 months of closing the merger.  During the World Cup, Vix was the #1 entertainment app in Mexico and a top 20 entertainment app in the US.  It has been launched across Spanish-speaking South America as well.  

US-based media companies are challenged on multiple fronts: (1) they have declining legacy linear businesses and pre-existing content licensing revenues to replace, (2) they now have to pay for customer acquisition, retention, and service, and (3) they must invest in expensive, exclusive content to populate their streaming services.

In contrast, TVU has an advantaged and enviable position.  Specifically:

1. It has a growing legacy linear business (US revs +6.8% YTD through Q3 2022, Mexican revs +12.9% YTD through Q3 2022) and the company has been growing ratings, unlike all its US peers.  

2. As mentioned before, TVU can use its own media properties to reach its target population with incredible efficiency.  US media peers have large platforms, but not nearly the same reach, with the largest reaching only low-teens % of their target population.  Disney+, Paramount, and Warner Bros Discovery all have to advertise on each other’s media properties, resulting in billions spent on customer acquisition, retention, and re-acquisition.  Meanwhile, TVU has >60% reach across its audio and video platforms and can self-serve much of its needs in the US and Mexico.

3. While TVU is investing in additional Vix-exclusive content, it can leverage its significant content production studios in Mexico, which produce content at a fraction of the cost of US media peers.  The company estimates its content production costs per hour are 60-80% cheaper vs. US peers.  

4. TVU retains full ownership and distribution of its content library, allowing it to operate without windowing or licensing constraints.  It doesn’t have significant legacy licensing revenues that it must disrupt to pursue its own DTC efforts.  Its vertical flexibility also allowed it to launch Vix (AVOD) and Vix+ (SVOD) within the same app, allowing premium SVOD subscribers to “fall back” into AVOD if they churn.  This helps with point #2 above - efficient churn management and reacquisition are key to sustaining attractive long-term economics.  

5. While there is other Spanish-language content on Netflix and some other platforms, there is no other service that is exclusive and dedicated to this population.  

These factors boil down to a superior path to EBITDA and FCF breakeven for TVU’s nascent streaming business.  TVU expects its streaming business to be profitable exiting 2023, after its first full year of operation - much earlier than others’ DTC efforts which are muddled with elevated content and advertising costs, all while disrupting their own legacy businesses.  Since the merger closed, it has reinvested the synergies from the TV/Univision merger and organic revenue growth into new investment opex to scale its DTC efforts, resulting in flattish EBITDA at a consolidated level.  

In terms of market sizing, we can triangulate on potential earnings power by discounting AVOD results from other services, adjusting pricing relative to GDP per capita across other Spanish speaking countries, and running sensitivities on penetration of LTE or better smartphones.  For reference, US streaming services with ad-supported tiers generate advertising ARPUs of $5-10 per month, and often the ad-supported pricing tiers generate superior ARPU to the premium ad-free ARPU.  

The charts above show the global revenue and EBITDA contribution potential (assuming 45% margins) of TVU’s DTC business across the Spanish-speaking world at various penetration levels.  Since AVOD has no paywalls, there is no reason why penetration levels cannot be very high very quickly, especially since there are no other pure-play, Spanish-language services on the market of any size or significant (TVU bought Pantaya, the other leading service, earlier in 2022).  

TVU’s legacy media business is on track to generate about $1.6b of EBITDA in 2022.  If we assume modest success of 50% AVOD penetration and 10% SVOD penetration, its EBITDA would be closer to $3b.  This result should be achievable within 2-3 years, if not sooner.  I believe low penetration rates, more efficient customer acquisition costs, and less competition argue for higher-than-average multiples for such a business.  Comps trade between 6x (WBD) and 11x (DIS).  If we conservatively attribute 7x to this business to accommodate for higher WACC of international markets (despite being funded in the US), TVU would be valued at $21b EV.  By that point, net debt would be closer to $5b, resulting in $16b of equity value.  TV’s 45% stake would be over $7b, or roughly $12.75/share.  

TVU has outside shareholders that expect liquidity from their investment at some point in time.  Wade Davis has invested nearly all of his net worth into TVU and will need liquidity at some point in time.  I expect TVU’s window to IPO in the US will open in late 2023 when the company starts disclosing more metrics as DTC begins to turn profitable.  

Even if investors value TVU at US media peers’ multiples and TVU doesn’t accomplish much in streaming, I believe its 45% stake in TVU would be worth about $4.50/share to holders of TV common.  

Cable

Televisa spent many years assembling a large cable footprint, now covering nearly 60% of households.  It proportionately owns about 85% of the equity in its cable operations.  

The cable growth story had been consistent with US-like dynamics until the last several years.  I would rate izzi today as a below-average cable business, with some relative positives and negatives.  Specifically:

Positives

1. National broadband penetration levels remain low at around 60%, leaving ample open field to gain customers over time.

2. The incumbent Telmex has been labeled a preponderant operator which has limited its ability to offer pay TV services, rendering competitive bundles fairly attractive.  It has a large base of DSL subscribers which the challengers are feeding on, in addition to secular penetration gains in the market.

3. ARPUs are low, affordable, and leave significant room for growth over time.  I estimate that Televisa’s ARPU (per customer) is under $30/month for ~2.5 RGUs per subscriber - a significant value vs. US options.  

Negatives

1. There is more infrastructure competition than anyone would like.  TotalPlay is a new entrant FTTH-only operator that has aggressively expanded its footprint and will end 2022 with nearly 18m passings (compared to Televisa’s ~20m).  Megacable is the #2 cable operator and has roughly 11m passings with expectations to end the year around 12m.  It has an ambitious plan to build 19m homes over the next 2 years.  If each company achieves its expansion targets, there will be much more facilities-based competition than other healthy cable markets with only 34m Mexican households.

Like others in the market, Televisa is embarking on a network expansion program that has increased its passings from around 15m in 2020 to about 19.5m at YE 2022.  It plans to expand its network by another 850k homes per year for the next several years.  Doing so has supported subscriber growth, with RGU additions of 1.4m in 2020 (big Covid benefit), 500k in 2021, and over 1m in 2022.  Subscriber volume growth should contribute to steady MSD revenue growth, all else equal.  

Megacable Merger

In early December, it was revealed that Televisa approached Megacable with a proposal to merge their operations in Mexico (see TV’s presentation on the opportunity here).  The offer consisted of a stock merger with a 19% multiple premium paid to Megacable and a dividend of roughly $750m paid to Megacable shareholders, ultimately resulting in 55% ownership to Televisa and 45% to Megacable.  The NewCo would retain Megacable’s existing listing in Mexico.  

Like other horizontal cable mergers, the synergies are significant and they are greatest now, before significant overbuilding begins.  In its merger presentation, Televisa argues for MXN$9b of run-rate synergies (about $450m annually, MXN$55b NPV).  Most of the synergies would come from materially reducing Megacable’s network expansion and capital intensity given the companies’ highly complementary footprints, with limited overlap today.

I believe this deal would create extraordinary value for both sets of shareholders for two reasons: (1) the synergies are highly visible and easy to realize (and I believe rather conservative), and possibly more importantly, (2) it solves a lot of investors’ concerns around cable companies overbuilding each other, which should lift multiples across the sector.  

Below are some of my estimates for NewCo, based on the deal terms disclosed:

Megacable rejected Televisa’s offer as too low, but I suspect additional negotiations are taking place and that they will find a solution that fits both parties’ needs.  There is an incredible amount of financial and strategic synergy to work with, and hopefully cool heads will prevail.  More importantly, I believe this news shows Televisa’s willingness to take strategic actions to maximize shareholder value.  

Once the synergies are fully realized, I believe the merger would be >50% accretive vs. standalone value, if not more.  

If a merger is not consummated, the base case is for the cable players to continue down their paths.  I would expect LSD to MSD revenue growth, steady margins, and improving FCF generation as capital intensity slowly declines.  Such a company should trade at a discounted multiple because (1) it’s in Mexico with higher WACC, and (2) it’s a structurally inferior cable market.  I use 4x which I believe is conservative vs. US cable peers at 7x.  Even in this standalone scenario at a discounted multiple, I believe Televisa’s attributable equity value (~85% share) is in the $6-7/share range.  

Summary

Televisa offers access to two very interesting situations: (1) a unique media growth story at TVU and (2) a horizontal consolidation opportunity in Mexican cable.  If neither value realization event occurs, you own one of the cheapest cable/media stocks in the market which should protect you on the downside once the large sellers are done.  The risk/reward skew is highly attractive and the holdco complexity and resulting SOTP discount should begin to close over the next 1-2 years.  

Catalyst

IPO of TelevisaUnivision and/or cable consolidation with Megacable in the next 1-2 years.