Business
Introduction:
Grupo Televisa is a
leading media company in the Spanish-speaking world, an important cable
operator and Satellite TV provider in Mexico. The company classifies their operations into four business segments: Content, Sky, Cable
and other businesses.
Grupo Televisa also distributes
the content it produces through several broadcast channels in Mexico, 26 pay-tv
brands in Mexico and abroad, and television networks, cable operators and
over-the-top or “OTT” services in over 50 countries.
In the US, Televisa's
content is distributed through Univision Communications Inc.
("Univision"), the leading media company serving the Hispanic market.
Univision broadcasts Televisa's content through multiple platforms, in exchange
for a royalty payment. In addition, Televisa has equity and warrants represent
approximately 36% on a fully-diluted. Univision Television Group owns 59
television stations in major U.S. Hispanic markets and Puerto Rico.
Grupo Televisa owns
a 58.7% interest in Sky, a leading direct-to-home satellite pay television system
in Mexico, operating also in the Dominican Republic and Central America.
Grupo Televisa cable
business offers integrated services, including video, high-speed data and voice
services to residential and commercial customers as well as managed services to
domestic and international carriers through five cable Multiple System
Operators (MSO) in Mexico.
Grupo Televisa also
has interests in magazine publishing and distribution, radio production and
broadcasting, professional sports and live entertainment, feature-film
production and distribution, and gaming.
Here is each of the
divisions’ business nature and economics.
Cable/broadband
Division:
Cable/broadband division
is the crown jewel of the business, especially the broadband internet division
under the cable division. Cable division generates 39% of revenues and 43%
operating income for the company. The economics of this division is wonderful
once the cable is laid out in a particular region/buildings and a few customers
are signed up, it becomes monumentally difficult for a competitor to do the
same and split the revenues and cash flows with an existing competitor and also
earn a decent rate of return. For that reason, the first mover cable business
becomes a monopoly in the region it operates and enjoys good returns on capital
for a long period of time.
This division has a subscriber base of 4.3M
video customers, 4.7M broadband internet customers and 3.6M telephony
customers against more than 14M homes passing in Mexico. Televisa Cable
business captures 22.5% of data customers in Mexico, compared to 16% at the end
of 2014. Mexico has just over 52% penetration of data services, which is one of
the lowest in Central American developed countries. Most of the customers
subscribe to Izzi’s least expensive data plan. Televisa Cable segment offer
includes multiple high-speed data plans for residential customers at 10, 20, 50
& 100 Mbps and for business customers at 25, 50, & 100 Mbps. As adoption of broadband data usage through
hand held devices such as tablets and smart phones and TV increases, cash flows
increase for Televisa Cable over time.
Cable segment has unusual
economic characteristics: It takes lot of initial capital to lay down the fiber
or coaxial and fiber(hybrid) cable to home. Initial consumption/adoption of
subscribers brings in small revenues relative to the operating expenses. As the
subscriber count increases, the expenses don’t increase at the same rate. As operating
leverage kicks in over 40% penetration, the company starts to make incredible
amount of returns on capital at that time. So, there is a clear lag of about 3-5
years for that extraordinary returns on capital to materialize. Until then the
financials of the division look rather ordinary. The initial years’ operating
expenses and depreciation masks the true potential of the business by a large magnitude.
One can see the revenue
growth of more than 46% in the last 5 years and operating income of more than 56%
in the below table.
Here are the segment
historical financials:
(In Ps. Millions)
|
2019
|
2018
|
2017
|
2016
|
2015
|
|
|
Revenues
|
41,702
|
36,233
|
33,048
|
31,892
|
28,488
|
|
Earnings from operations
|
17,798
|
15,303
|
14,035
|
13,236
|
11,406
|
Content
programming and
Advertising Division:
Content division
generates 37% of revenues and 39% operating income for the company. Among the
content division, the advertising derives 64%, Licensing and Syndication brings
in 25% while Network subscriptions brings in remaining 11%. The content
division used to be a larger percentage of revenues and cash flows just over 7
years ago, its importance and contribution has declined as the cable/broadband
division became larger.
Televisa also earns
royalty incomes of 16.45% of total revenue from 'Univision USA' by supplying the
content. The content is just an extension of whatever they already produce for
their own market in Mexico and other Spanish speaking world.
Televisa’s content
division used to be a monopoly in Mexico in terms of viewer time spent where
the linear TV dominated the in-home entertainment. This position has slowly
waned as the linear TV and TV advertisement has slowed due to the
online streaming and other advertisement avenues. This is still a good division
in terms return on of invested capital employed. They are in transition from
linear TV to OTT to their natural audience. Every other year (2014,2016,2018),
the Olympics and World cup Football brings in increasing revenues and cash
flows. This year 2020 supposed to be an Olympics year, now Covid-19 delayed that
prospect.
Here are the segment
historical financials:
(In Ps. Millions)
|
2019
|
2018
|
2017
|
2016
|
2015
|
|
|
Revenues
|
34,796
|
39,224
|
33,997
|
36,687
|
34,333
|
|
Earnings
from operations
|
12,632
|
14,855
|
12,825
|
14,748
|
14,564
|
Sky
satellite Division:
Televisa has 58.7%
ownership in ‘Sky’, a venture with DIRECTV. Sky has more than 7.5M subscribers.
Satellite division generates 18% of revenues and operating income for the
company. Satellite division produces great amount of cash flows on their
invested capital. It lacks the reinvestment opportunities given the TV
penetrations in Mexico and Dominican Republic. These cash flows are utilized in
other growing divisions within the company. They are also developing their own satellite
broadband business picking up subscribers quickly reaching more than 200,000
within a year.
Here are the segment
historical financials:
(In Ps. Millions)
|
2019
|
2018
|
2017
|
2016
|
2015
|
|
|
Revenues
|
21,347
|
22,002
|
22,197
|
21,941
|
19,254
|
|
Earnings
from operations
|
9,121
|
9,767
|
10,107
|
9,899
|
8,972
|
Other
Division:
There are numerous businesses
other than the above listed historically developed, acquired that produces cash
flows although they are smaller size of the total pie in Televisa. Here are
some of them:
Publishing: Televisa
publishes 136 magazine titles in 15 countries.
Gaming: Play City,
Televisa’s casino business, includes 17 sites across the country with close to
6,500 Electronic Gaming Machines. Multijuegos, Televisa’s lottery business,
includes both retail and digital products.
Soccer: A first division
soccer team of the Mexican league and owner of Mexico’s Azteca stadium.
Radio: As an important
participant in Spanish-language radio in Mexico, Televisa broadcasts news,
music, and talk show programming through a network of 99 radio stations. Of
these stations, 17 are owned and 82 are affiliates owned by third parties.
Feature-Film
Distribution: Distributes movies in Mexico and Latin America.
This ‘Other’ division
generates about 8% of revenues and 1% operating income for the company. This
segment has been getting streamlined for the last few years as the 3 core
segments are getting more attention and resources.
Here
are the segment historical financials:
(In Ps. Millions)
|
2019
|
2018
|
2017
|
2016
|
2015
|
|
|
Revenues
|
8,200
|
8,636
|
8,376
|
8,828
|
8,124
|
|
Earnings from operations
|
1,464
|
754
|
490
|
1,041
|
753
|
Consolidated
Historical Financials:
The
below table gives the consolidated view of Televisa. Maintenance capital
expenditure line is my estimate based on the depreciation schedule and
comparing other industry standards.
(In Ps. Millions)
|
2019 |
2018 |
2017 |
2016 |
2015 |
|
|
Revenues |
101,492 |
101,282 |
94,274 |
96,287 |
88,052 |
|
Operating Cash flow |
41,015 |
40,679 |
37,457 |
38,923 |
35,695 |
|
Interest Expense |
10,402 |
9,707 |
9,246 |
8,498 |
6,239 |
|
Maintenance Capex |
13,500 |
13,500 |
13,000 |
12,000 |
11,000 |
|
Free Cash Flow |
17,113 |
17,472 |
15,211 |
18,425 |
18,456 |
|
Cash and Equivalents |
27,452 |
38,654 |
38,735 |
47,546 |
49,397 |
|
Total Assets |
290,422 |
297,842 |
297,220 |
309,054 |
281,474 |
|
Debt |
120,445 |
121,972 |
121,993 |
126,147 |
107,431 |
|
Net Debt |
92,993 |
83,319 |
83,258 |
78,601 |
58,034 |
|
Stockholders’ Equity |
90,627 |
89,711 |
85,662 |
83,792 |
87,383 |
Conservative
balance sheet:
Total debt (Q4 2019):
Ps$120.4 billion
Financial Assets: Ps$27.4
billion
Net debt: Ps$93 billion
Average maturity: 14.71
years
Net Debt / EBITDA Ratio
2.2x
Valuation:
I have taken a few ways
to highlight the value of the company. I also made the valuation numbers in
USD. 1 USD = 24 Mexican Peso
As
of May 2020, multiples:
Stock Price (ADR) ~ $5/share;
Shares Outstanding – 585 Million;
Market Cap ~ $3 Billion
Pre-tax Free Cash flow –
$ 0.71B
Price/ Pre-tax Free Cash
flow ~ 4.28 times or 6 times of after-tax free cash flow
Conservative
Parts valuation:
Content
division:
10 times Operating
earnings – $5B
Univision
Ownership:
This unit’s valuation is subject
to lot of assumptions as the future of this division doesn't seem robust given
the trend in this business. News reports have indicated the valuation of $9B -
$20B based on the planned IPO process until late last year. Even in the low
end, the equity will be worth more than $3B given their $6B debt load. It makes
this unit ownership (36%) worth more than $1B.
Univision - $1B
Total Content division –
$6B
Sky
satellite Division:
Operating earnings - $223M
(58.7% ownership)
10 times Operating earnings
– $2.2B
Cable
Division:
Operating earnings - $741M
12 times Operating
earnings – $8.9B
Other
Division:
Sales - $466M
2 times sales ~$1B
Total Enterprise Value –
$18.1B
Net Debt – $4.4B
Net
Equity Value – $13.7B or $23.4/share
Another
way – Potential Cumulative profits in next 5 years:
I believe the company will
generate $4B to $5.5B in cumulative after-tax profits in next 5 years based on
conservative assumptions from here, which is 130% to 165% of the company’s market
cap today. That will either be kept in the balance sheet or reinvested in
profitable assets or distributed via dividends and or stock repurchases. If they
elect to buy back the shares, they can retire all of the shares outstanding 😊.
If one wants to look at
the individual divisions to be separate businesses listed, each division can
command a valuation equal or more than the current market cap of the whole
company.
Catalysts:
· Capital Investment intensity is reducing
after years of cable investments, hence the free cash flow acceleration.
· Televisa has been selling non-core
investments to focus on core businesses; it had sold the Spanish media and
communications company ‘Imagina Media Audiovisual’ for more than $350m early last
year.
· John Malone’s Lieutenants Mike Fries,
David Zaslav and Jon Feltheirmer have been on board since 2015 and have been exploring
options to increase the shareholder value including separating the business divisions.
Risks:
· General economic downturn may hinder the
growth of the business as the content/ad-revenue business is cyclical
especially given the Covid-19 crisis now.
· Macro-economic uncertainty can create less-fruitful
relationship with major trading partner US and their US based investments
holdings.
· Mexican Peso devaluation against USD may
produce an unfavorable result for US investors although the business and stock
value reflect the reality over time.
Summary:
· Highly profitable business with high
return on Invested capital, the ability and opportunity to re-invest the profits
at attractive ROI, the management is both capable and shareholder friendly co-owners.
· The business is selling in the market currently
for 6 times of it’s after tax free cash flow.
Disclosure: I own a
significant position in shares of Televisa.
No comments:
Post a Comment