When Hallmark Cards Inc. acquired a 63.5% stake in Univision in 1988, the Spanish-language television network had just four news correspondents--all stationed in the United States, far from Latin America and many stories of interest to the network's mostly Latino viewers.
But hoping to capitalize on increased advertiser interest in the nation's more than 20 million Latinos, the closely held greeting card concern spent heavily to make Univision a first-class operation.
It hired 16 more news correspondents to work in the United States and Latin America, said Guillermo Martinez, Univision's vice president for news. And programming Vice President Rocita Peru made a similar expansion in the non-news area, increasing domestically produced programming by more than 25%.
The changes at Univision--the nation's largest Spanish-language TV network, with eight U.S. television stations including KMEX Channel 34 in Los Angeles--have drawn praise from Univision broadcast advisory board member and former skeptic Herman Gallego, who now calls the network "first-rate." But the heavy spending, Hallmark officials concede, has rendered some of Univision's financial IOUs second-rate.
Early this month, after disclosure that Univision missed interest payments on $270 million of junk bonds, Hallmark offered to rescue its troubled Univision Holdings subsidiary by buying back its bonds for about 40 cents on the dollar. Kansas City, Mo.-based Hallmark would then give Univision breathing room by defering interest payments for five years.
"Unless the restructuring plan is implemented within a reasonable period of time, (Univision) will continue to be unable to meet its debt service obligations as they come due," forcing the company into bankruptcy or liquidation, Hallmark stated in its repurchase offer, which requires at least 95% of the bonds to be tendered.
Hallmark's offer, set to expire March 7, is the latest fallout in a series of leveraged buyouts gone sour and comes as New York-based Univision faces increasing competition from rival Telemundo Group and upstart Spanish-language cable network Galavision.
Between 1986 and 1989, Telemundo purchased or built television stations in Los Angeles and four other cities already served by Univision. And next month, Galavision will begin its expansion from a basic cable network to a regional over-the-air broadcast network serving California, Texas, Arizona, New Mexico and Illinois. (Galavision already has one part-time over-the-air affiliate, KWHY-TV Channel 22 in Los Angeles.)
The three networks have waged a heated battle for the $119.6 million that Hispanic Business magazine estimates was spent last year to advertise on Spanish-language network television. Although officials say advertising revenues and ratings have increased for all three networks, the growth has been fastest at Telemundo.
"To some extent, our growth (came) at the expense of Univision," conceded Henry R. Silverman, who resigned as president of Telemundo to join the New York investment banking firm Blackstone Group on Feb. 2. Silverman also noted that because Telemundo's expansion has been financed by a 1987 sale of stock rather than bonds, Telemundo, compared to Univision, "has a strong competitive advantage on a purely financial basis."
Despite Univision's financial problems, news vice president Martinez said so far there has been no belt tightening and the network continues to hire news personnel.
Although Univision officials declined to comment for this story, Univision Holdings President J. William Grimes has been quoted as saying he supports such heavy program expenditures.
"Advertisers tell us they want their ads run in programs that look modern and address the needs of the U.S. Hispanic market," Grimes recently told the trade magazine Advertising Age.
Many close to Univision, such as Leobardo Estrada, a UCLA professor of urban planning who also sits on Univision's 12-member broadcast advisory board, said they have also been told by Univision officials that the network will not cut back in the face of its financial woes.
"They told us they had lower revenue than expected and much higher than expected expenditures on equipment and facilities," said Estrada, who attended a meeting with Univision officials in December. "But the company did not back down to its commitment to improve the quality of programming."
Univision was put together over the past two years as Hallmark and partner First Chicago Corp. acquired eight television stations in California, Texas, New York, New Mexico and Florida, as well as the Univision network, for about $600 million.
In the process, however, the company took on a huge debt load, totaling $555 million at the end of last year. Annual debt service totals about $52.2 million, according to Hallmark.
By comparison, former Telemundo President Silverman estimates that network's debts at about $250 million, of which only about $60 million requires cash interest payments.
Univision was finally overwhelmed by its crushing debt on Feb. 1, when it failed to make interest payments due on its bonds and bank loans. Because Hallmark expects that the defaults will continue without some form of reorganization, it has proposed to reduce Univision's debt service by buying back its bonds.
But in proposing the plan, Hallmark is driving an unusually hard bargain, offering just 40 cents on the dollar for the discount bonds, for which investors originally paid almost 67 cents for each dollar of face value.
Experts believe that Hallmark thinks it will be difficult for Univision investors to sell their issues for more than that in the depressed $200-billion junk bond market, which has become even more chaotic in recent days after the collapse of Drexel Burnham Lambert. (The acquisition of Univision was financed, in part, with junk bonds issued by Drexel.)
"There's no way you can put a value on Univision paper outside the context of the junk bond market," said Ronald Vannuki, managing director at Drake Capital in Santa Monica. "Although the long-term prospects of Spanish-language broadcasting are excellent, I'd say (Hallmark's) offer is generous considering the state of the junk bond market today."
Hallmark is offering 45 cents on the dollar for Univision's senior subordinated discount notes, or a total of about $74 million for the $165 million issue. It's offering 30 cents on each dollar for the subordinated debentures, or a total of $31.5 million for the $105-million issue. And Hallmark is seeking concessions from the bank group headed by Continental Bank Corp. on $315 million in loans as well as undisclosed concessions from First Chicago, which holds a 21.5% stake in Univision.
Although nearly all media--including newspapers, magazines and broadcasting--are feeling the financial pinch from a recent slowdown in advertising, Spanish-language television has been especially hard hit because of advertiser resistance in some key categories such as automobile replacement parts, cosmetics and children's toys, according to Jack Feuer, editor and publisher of U.S. Hispanic Report, a national newsletter on the Latino market.
Still, Feuer believes that advertiser interest will increase and revenue will climb once Nielsen and other television ratings services complete installation of newer and more accurate TV rating meters in Latino households across the United States during the next year.
"This is not, by any stretch of the imagination, a bad investment" for Hallmark, Feuer said. "If they can hold on for a little while longer, the situation should turn out for the better."