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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