Televisa Is Key to Deal for Univision

When it comes to finding a buyer for Los Angeles-based Univision Communications Inc., all roads lead south of the border.

Mexico’s media colossus, Grupo Televisa, has long been looking for a way to increase its 10.8% stake in Univision, the dominant Spanish-language media company in the U.S. In February, when Los Angeles billionaire A. Jerrold Perenchio put the company that he has tightly controlled for 14 years on the block, Televisa got ready to pounce.

Mexico’s largest broadcaster is working with investment banking firm Allen & Co. to structure a bid, according to two sources involved in the process. At the same time, several private equity firms have been wooing Televisa to join with them in their bids.

The reason: Under a long-term programming agreement, Televisa produces Univision’s most profitable shows, the wildly popular telenovelas. When that exclusive arrangement expires at the end of 2017, whoever owns Univision (analysts say it could fetch as much as $14 billion today) will need to have Televisa -- and its hit-making machinery -- on its side.

“It doesn’t make sense to buy Univision without Televisa,” said Luis J. Echarte, chairman of Azteca America, a U.S. Spanish-language television network owned by TV Azteca, Mexico’s second-largest broadcaster. “That would be too big of a risk for the amount of money at stake.”

If he can pull off a deal for Univision, Televisa’s 38-year-old chairman, Emilio Azcarraga Jean, will achieve a lifelong goal: returning to his family the company that his grandfather founded in 1961 and his father was forced to sell a decade ago. It also would give Azcarraga Jean a much bigger slice of the growing Spanish-language advertising pie in the U.S.

Azcarraga Jean faces a significant obstacle: Televisa cannot buy Univision outright. Federal rules bar foreign companies from holding more than 25% of a U.S. broadcasting company.

Investors, however, say there are ways to structure a deal so that the station group and television networks are considered separate entities. Under such a scenario, Televisa could give up control of Univision’s 62 television stations while keeping control of its two broadcast networks, cable channel, music division and Internet properties.

In Mexico, Televisa boasts four television networks of its own, as well as cable channels, hundreds of TV and radio stations, satellite television, a feature film production unit and a publishing arm that distributes more than 80 magazines. It also owns three soccer teams, Mexico City’s Azteca Stadium, a discount airline and off-track betting parlors.

Through their representatives, executives at Univision and Televisa declined to comment for this article.

If private equity firms band together to buy Univision, the acquisition would be the third-largest private-equity deal ever, behind the $31-billion leveraged buyout of RJR Nabisco in 1989 and last year’s $15-billion purchase of Hertz Corp. Sources close to the discussions stressed that the Univision auction was far from over, and there was no preferred bidder. Sources requested anonymity because of the confidential nature of the bidding process.

Still, two months after Univision announced that it was exploring its “strategic alternatives,” the reasons for the sale are coming into sharper focus. The company’s chairman and chief executive, Perenchio, is 75. After a long and successful career that included stints as a Hollywood talent agent, boxing promoter, television and film company partner, he is ready to retire, say those who know him.

Industry veterans also note that the timing is right. This summer, Univision will reap the advertising spoils of the World Cup of soccer, an event held once every four years. Univision’s ad revenue is growing twice as fast as most English-language media companies, in part because Univision’s dominance has been validated by its recent inclusion in Nielsen Media Research’s national ratings survey.

More important, Perenchio realizes that by selling Univision now, he will give the buyer the several years it will need to realize its investment. Should a sale be completed in the next few months, investors would have at least 10 years to enjoy exclusive rights to Televisa’s programs.

Televisa is not the only company interested in Univision. One private equity team -- Goldman Sachs, Texas Pacific Group and Thomas H. Lee Partners -- plans to make a bid for Univision even if Televisa joins another team, according to two sources involved in the sale.

“It doesn’t have to be Televisa,” said Philip Remek, a media analyst with Miami-based investment firm Guzman & Co. “But the buyer has got to be someone who is going to have a good relationship with Televisa since Televisa provides so much of the programming.”

Among the big media companies, the most logical buyer would be Time Warner Inc., Remek said. Unlike their rivals, only Time Warner and Walt Disney Co. could buy Univision without running afoul of Federal Communications Commission rules that limit the number of stations a company can own. (Disney has not shown interest, having recently acquired Pixar Animation Studios.)

Time Warner already owns Spanish-language properties. Last year, it acquired a company that publishes 15 magazines in Mexico. In December, Time Warner also struck a programming deal with Televisa, providing the TV broadcast rights to such Warner Bros. gems as “Harry Potter and the Chamber of Secrets,” “Batman Begins” and TV’s “The Sopranos” and “ER.”

Televisa has encouraged Time Warner to become its bidding partner, according to a source familiar with the discussions. However, Time Warner’s chief financial officer recently suggested that the price of Univision was too steep.

Time Warner has vowed to buy back its own shares as part of an agreement to mollify an unhappy investor group led by Carl Icahn. But such a large buyback program could boost the company’s debt to $30 billion, making a buyout of Univision trickier.

Other possible bidders include publisher Hearst Corp., News Corp. and CBS Corp., sources said, though CBS’ chief financial officer recently compared buying Univision to climbing Mt. Everest.

“The more likely suitors are large private equity companies,” Bear Stearns analyst Christopher Recouso wrote in a recent report, adding that such firms “have been going hog-wild buying media assets in Europe.”

There are three sticking points that will complicate any sale.

The first involves the expiration next year of Univision’s right to air Televisa’s telecasts of Mexican soccer matches. Prospective buyers probably would want to extend that pact.

The second complication involves new media. The Televisa-Univision programming agreement does not permit Univision to repackage Televisa shows on the Internet or other digital platforms that are quickly becoming a revenue stream for entertainment companies.

The third thorny issue is a lawsuit that Televisa filed last year against Univision. The suit alleges that Univision breached the programming agreement and cheated Televisa out of royalties. Last week, Televisa’s Los Angeles attorneys amended the suit and demanded that the programming agreement be terminated.

Some analysts view the court maneuver as a way for Televisa to dissuade rival bidders and strengthen its hand.

“Any bidder would have to think twice before purchasing a company involved in litigation with its primary supplier,” Merrill Lynch media analyst Jessica Reif Cohen wrote in a recent report. “We would not be surprised if Televisa joined private equity investors in a bid for Univision.”