News Column

Fitch Expects to Rate Televisa's Senior Notes 'BBB+(EXP)'

May 8, 2014

CHICAGO--(BUSINESS WIRE)-- Fitch Ratings expects to rate Grupo Televisa, S.A.B.'s (Televisa) proposed senior unsecured notes up to USD1 billion 'BBB+(EXP)'. Proceeds from the issuance are expected to be used for general corporate purposes.

Televisa's 'BBB+' ratings reflect the company's strong business position as the leading Mexican TV Broadcaster and one of the largest media companies in the Spanish-speaking world, diversified media and telecommunications portfolio, solid financial position underpinned by its robust free cash flow generation and liquidity, as well as the extended debt maturity profile. Televisa's ratings factor in the company's exposure to economic cycles, strong competition across business segments, and increasing regulatory pressure in Mexico.

The ratings also reflect Televisa's strategy to expand its business through organic growth and cash investments for acquisitions. The recent investments made by Televisa include its purchase of MXN7 billion convertible notes and MXN2.5 billion debt instrument of Tenedora Ares, S.A.P.I. de C.V. (ARES). ARES is the owner of 51% of Grupo Cable TV, S.A. de C.V. (Cablecom), a Mexican cable operator. Televisa has also invested in Univision Communications, Inc. (Univision), a U.S. based Spanish language broadcast network, and Iusacell, a Mexican mobile operator. The company's growth strategy continues to be centered on telecommunication in Mexico and the US media sectors. If Televisa receives regulatory approval to convert its investment in ARES into equity, its business position and cash generation will improve.

KEY RATING DRIVERS

Robust Cash Generation from Contents

Televisa's high quality in-house content production has enabled it to maintain its large broadcasting market position in Mexico, which has given it a stable audience and reliable advertising revenue stream. The company generates well over 10% of its total revenues from network subscriptions and licensing/syndication businesses, as a result of the increased pay TV subscribers globally including Mexico and higher royalties from contents sales. Televisa distributes its contents to more than 50 countries including the United States through a Program License Agreement (PLA) with Univision which provides a stable royalty income until 2025, or beyond, should Televisa remain as a shareholder. Content sales also improve geographic and currency diversification which helps mitigate the risk stemming from the maturity and intense competition of the Mexican broadcast industry.

Regulatory Pressure to Increase

Fitch expects the on-going constitutional reform on the Mexican media sector to result in an increased level of competition in the long-term; the impact should be manageable for Televisa, however, as Televisa's content production ability remains intact, which remains key to advertisement revenue. Fitch does not foresee any significant dilution of the company's market share over the medium term, and thus its cash flow and financial profile will remain relatively stable. Fitch believes that it will require significant time and resources for new entrants to become competitive in their contents quality against Televisa.

Televisa was declared as the 'preponderant' operator in the broadcasting sector during March 2014 and unfavourable regulatory measures were imposed on the company. These measures include broadcasting infrastructure sharing and making available the company's over-the-air channels to third party platforms on the same terms and conditions as those offered to its affiliates. The reform measures will also allow two new broadcasters in the market. Televisa has already been subject to the 'must-offer' regulation and guided for only about MXP1.4 billion revenue decline from this new measure, which is less than 2% of the total sales Fitch forecasts in 2014. On the other hand, Televisa's pay-TV and Telecom operations could benefit from a more favourable competitive environment from the regulation.

Operational Diversification Continues

Solid growth in the company's pay-TV and telecom businesses has continued to support its diversification from broadcast advertising revenues. Integration of the content production and solid distribution channels has been the company's key business strategy enabling a more stable operating performance and stronger business profile compared to its regional peers. In the first quarter of 2014, Televisa generated more than half of its total operating segment income from non-contents segment, with Sky, its direct-to-home (DTH) satellite operation, and Telecommunications segment accounting for 32% and 27% of the total operating segment income, respectively. The company has maintained a double-digits revenue growth for these businesses which has helped mitigate slowing industry growth from the advertising business.

Strong Cash Generation

Fitch forecasts Televisa to maintain its positive FCF generation over the medium term. Fitch expects the company's cash flow from operations to continue to be robust, well over MXN20 billion in 2014, which will comfortably cover its capex, which is likely to remain high in line with the 2013 level of over MXN14 billion. During the past three years (2011 - 2013), Televisa spent approximately MXN12 billion on average for capex annually, primarily to improve its business position in the DTH and telecom segments, as well as to invest in the mandatory digitalization. In the same period, due to the high capex, dividend payments have remained at the minimum authorized level at approximately MXN1 billion on average annually.

Solid Financial Profile

Fitch expects the company's total adjusted-debt-to-EBITDA ratio to remain near 2.0x and its net-debt-to-EBITDA ratio to remain below 1.5x in the long term, on a pro-forma basis reflecting the recent Cablecom transaction. As of Dec. 31, 2013, the company's gross and net leverage were 2.3x and 1.6x. These ratios were increases from 2.2x and 1.3x during the prior year. Fitch forecasts these metrics to gradually strengthen in the absence of any sizable investments amid stable FCF generations.

The company also has a robust liquidity as of March 31, 2014 with cash and temporary investments of about MXN22.2 billion fully covering MXN657.9 million of short-term debt. The company does not face any significant debt maturities until 2016, when approximately MXN9 billion of financial obligations become due.

RATING SENSITIVITIES

Fitch's expectation of sustained increases in the leverage ratios could result in a negative rating action. On the other hand, further geographical and business diversification coupled with consistent free cash flow generations and a lower leverage could be seen as positive for the ratings.

Additional information is available on www.fitchratings.com

Applicable Criteria and Related Research

--'Corporate Rating Methodology' (Aug 5, 2013).

Applicable Criteria and Related Research:

Corporate Rating Methodology - Effective 12 August 2011 to 8 August 2012

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=647229

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=829237

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Fitch Ratings

Primary Analyst

Alvin Lim, CFA

Director

+1-312-368-3114

Fitch Ratings, Inc.

70 West Madison Street

Chicago, IL 60602

or

Secondary Analyst

Gilberto Gonzalez

Associate Director

+52-81-8399-9100

or

Committee Chairperson

Sergio Rodriguez, CFA

Senior Director

+52-81-8399-9100

or

Media Relations:

Elizabeth Fogerty, +1-212-908-0526 (New York)

elizabeth.fogerty@fitchratings.com


Source: Fitch Ratings


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