News Column

Surviving on the Air

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It's 7:32 on a Thursday morning, and New York City commuters are shuffling off to work. WSKQ-FM – MEGA 97.9 – is there with the aural caffeine, fueling listeners with salsa, reggaeton, and amusing chatter from a crew of colorful characters led by Dominican-born Juan Carlos and Puerto Rico's Frankie Jay.

"Vieja ladrona," they greet a caller. The "old thief" identifies herself as a 78-year-old woman with a randy mouth that is bawdier than her years. She trades lighthearted yet saucy barbs with one of the show's sidekicks, ultimately suggesting that she liked him better when he used to bathe.

The morning show, El Vacilon de la Mañana, is as frenetic as a Daddy Yankee hit single. Like the reggaeton star, the station doesn't miss a beat either. Even after replacing both morning show hosts earlier this year, Spanish Broadcasting System's Mega 97.9 remains the most popular Spanish-language radio station in the country.

The lively morning show is syndicated through SBS-owned stations in key Hispanic markets like Miami, Orlando, and Atlanta. It's a recipe for success, one that the company knows all too well as it beams original content through its network of 20 radio stations.

According to the latest Arbitron ratings, SBS operates four of the seven most listened-to Spanish-language stations in the country. It's a good place to be. With Hispanic voters possibly holding the key to the 2008 election, local, state, and presidential candidates are expected to spend plenty on Spanish-language radio advertising over the next 18 months.

It's a rosy scenario, until you pull up a stock chart.

Turning Down the Volume
With shares of Spanish Broadcasting System (Nasdaq: SBSA) fetching less than $3 apiece, it's a far cry from when the stock peaked at $42 shortly after its 1999 IPO.

The numbers aren't encouraging. Through the end of June, SBS has missed analyst estimates in each of the four previous quarters. It has posted a loss in three of those four quarters, and seen three consecutive quarters of top line declines.

If you see the vieja ladrona, can you ask her to return the groove back to SBS?

Radio-related revenues at the company fell by 5 percent during the June quarter. Operating profits have also declined, with another dip projected for the third quarter. Strength in New York hasn't been enough to offset the weakness in national and local ad sales in Los Angeles and Miami.

The problem is that the company isn't stacking up well against the competition.

Univision is the market leader with 70 radio stations in 16 of the largest domestic Hispanic markets after its acquisition of Hispanic Broadcasting Corporation five years ago.

During that same June quarter, Univision's radio revenues climbed 12 percent. Entravision, another publicly traded competitor with 47 Spanish-language radio stations, reported a 9 percent increase in radio segment revenue.

That's the rub. If the company can't keep up with the competition on the radio airwaves, how is it going to keep pace with its better-bankrolled rivals in larger areas like television and cyberspace?

These are trying times for traditional media companies. Newspaper circulations are declining and advertisers are migrating to the Internet. Radio giants such as Univision and Clear Channel Communications may have been acquired at healthy premiums in 2007, but it's still a sluggish market. It doesn't help that XM Satellite Radio and Sirius have sucked in nearly 16 million of the most ardent radio fans, striking factory-installed deals with all of the major automakers.

TV or not TV
Spanish Broadcasting is trying its best to expand its audience. It is perpetually refashioning its fledgling LaMusica.com Web site as a way to connect Latin music fans with its network of stations. The company also launched its own television station – Mega TV – in South Florida last year.

Pitting itself against Univision and General Electric's Telemundo in the hotly contested Miami television market, SBS now has a visual outlet to go along with its network of radio stations. It's a gutsy move, though an expensive one. Mega TV is in line to bring in roughly $10 million in revenue this year, but it is incurring steep operating losses to get there.

"I believe the company as a radio company can not only survive and do well, but do much better if it was not involved in a single television station, which is always a problem," argues Cuban media pioneer Eduardo Caballero.

Mr. Caballero, who has bought and sold radio and television stations before, has been an SBS shareholder since its inception as a public company. His friendship with the Alarcon family that runs SBS stretches back to their time as budding media moguls working together in Cuba.

Mr. Caballero feels that Mega TV is a costly distraction for the company. It is difficult to attract national advertisers in a single localized market. Programming televised content for a single market doesn't come cheap, either. Mr. Caballero believed that the company was going to launch a music-based channel, feeding into its FM radio strengths, but SBS went for more conventional programming instead.

Mega TV is going national, now that SBS struck a deal in October to get its nascent network distributed through satellite television provider DirecTV. If successful, it will be a welcome ambassador to the Mega brand that SBS has been building on the radio airwaves for years. However, Mr. Caballero still says that Mega TV's reach through the satellite television premium service will be too thin to be a factor. His suggestion would be to sell Mega TV and use the money to bankroll more radio acquisition.

Sure, it's easy to see why SBS has warmed up to television. It's where rivals such as Univision and Entravision are thriving. Mega TV also gives SBS a way to cash in on the political ad spending that is expected to intensify over the next year heading into the November elections. That is money that has traditionally funneled to AM stations, away from SBS's FM stronghold.

The Power of Integration
"The promotion we enjoy from our three Univision networks and local TV stations is tremendous," says Univision Radio President and COO Gary Stone. "But, at the end of the day, our success is the result of programming to our listeners in a way that connects with their interests, needs, and desires."

However, even Mr. Stone admits that Univision's cross-promotional opportunities across several platforms give his radio stations a competitive advantage in drawing audiences and filling the marketing needs of its sponsors.

But is SBS a day late and a dollar short in the media integration playbook?

"There are financial and economic issues why we have to be choosy as to how we distribute our content," SBS's CFO Joseph Garcia says from his company's Miami headquarters.

In short, the company can't transform itself into Univision overnight. Snapping up poorly performing English-language radio stations at a pittance, then using those signals for Spanish-language formats in underserved markets is a sound strategy that companies such as Univision and SBS have capitalized on.

But it's a whole new ballgame when it comes to television. Mega TV faces a challenging value proposition, and carving out an Internet presence is simple in theory, but it's hard to compete against the dot-com heavies with billions of greenbacks in their arsenal.

An abundance of money is a luxury that SBS does not have. The company closed out the June quarter with $261 million in net debt. In October, Moody's downgraded the company's debt.

"I am very comfortable with the company being able to service its debt," Mr. Garcia says, arguing that the downgrade is emblematic of the economic malaise on the whole. "I have absolutely no worries about that."

So what is holding SBS back? The company believes that it is addressing its operating issues. It has had what Mr. Garcia believes to be fruitful conversations with its national reps to help drum up better national ad campaigns. It has also made talent changes.

"I am confident that we will be able to turn that around," Mr. Garcia says.

Weighing the Options
The real question is if the company can turn itself around on its own.

"If the company were to sell off its individual assets or offer itself up in an LBO (leveraged buyout), we believe there could be substantial upside in the stock," JP Morgan analyst John Blackledge wrote in a note to investors over the summer.

It's a popular thesis. Both Mr. Caballero and Mr. Blackledge seem to agree that SBS shares could trade higher if the right assets are sold. They may be biased – Mr. Caballero is a longtime investor and Mr. Blackledge's firm upgraded the shares in May – but they may be right.

The trick is making SBS realize that, given that management controls 80 percent of the voting power.

"Were SBS to receive offers materially higher than its current market value but management refused to accept them, then our view on the stock would be at risk," Mr. Blackledge suggests.

So can SBS survive without a suitor? It's a question I posed to the office of CEO Raul Alarcon Jr., but they chose not to comment.

Rick Munarriz is a personal finance columnist for HispanicBusiness.com. He has written for sites such as The Motley Fool and Citysearch and has appeared on NPR, TechTV, and CNN en Español. He can be reached through Reportedly.com, where he discusses his latest articles.

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