Radio Centro’s TV Dreams Could Come at High Cost for Investors

Grupo Radio Centro SAB, a Mexico City radio broadcaster that won a national television license in March, is looking for a way to pay the 3.06 billion peso ($205 million) bill.

Radio Centro, whose live news updates and traditional ranchera music reach about half the capital’s listeners, won one of two new TV networks auctioned by the telecommunications regulator last month. The price is equal to its total assets and more than triple sales last year, according to filings. Radio Centro had 177 million pesos in cash as of Dec. 31.

The company’s stock jumped more than 40 percent to a record 25.4 pesos within a week after winning entry into Mexico’s concentrated broadcast industry, where Grupo Televisa SAB and TV Azteca SAB account for 96 percent of the audience. Radio Centro will need to issue new shares or take on debt to make its payment, Morningstar Inc. said in a note. Winning bidders in the March 11 auction have 30 days to ante up.

“With just savings, at least with what they have in cash, they can’t pay for it,” Jesus Romo, an analyst at Telconomia, said in an interview from Columbia, Missouri. “An option is to round up partners interested in the content business, which is what will end up attracting audiences and advertisers.”

Several calls and e-mails seeking comment from Radio Centro weren’t returned. In an interview published Tuesday in El Financiero newspaper, Francisco Aguirre, the company’s chairman said, “I’m not going to lose my money, if I entered the auction and bid high, it was to win it.”

Two Decades

The auction marks Mexico’s first national TV broadcast license awarded in more than two decades, since billionaire Ricardo Salinas purchased the state-owned broadcaster in 1993, now known as TV Azteca.

It’s part of President Enrique Pena Nieto’s push to increase competition in the broadcast and telecommunications industries, dominated by a handful of Mexico’s richest families. Cadena Tres I SA, the only other bidder, also won a national TV license through the auction for 1.8 billion pesos.

Radio Centro’s new network, set to reach more than 88 percent of Mexico’s population, “stretches the firm’s balance sheet and threatens Radio Centro’s moat,” Dan Wood, a Morningstar analyst in Chicago, said in the March 12 note.

“Both Televisa and TV Azteca are significantly larger companies and could lower prices or invest heavily in marketing to slow Radio Centro’s adoption with consumers,” Wood said.

The regulator, known as IFT, hasn’t been notified of any payment by Radio Centro and the terms of the auction don’t offer an option for a extension of the payment date, a press official for the agency said.

Capital Intensive

Last year, the IFT declared Televisa dominant in the broadcast industry, with about 70 percent of the nation’s viewers. As a sanction, Televisa must provide access to its network infrastructure to Radio Centro and Cadena Tres. Televisa and TV Azteca must also let other carriers retransmit their most popular channels for free.

While entering the TV market diversifies Radio Centro’s business, it is also a capital-intensive investment with growing competition, said Alberto Moreno, senior director of corporate ratings at Fitch Ratings in Monterrey, Mexico.

“To the extent that financing is done through capital injections without deteriorating the company’s credit profile, we don’t anticipate changes in our rating,” Moreno said.

Radio Centro has a 5.35 ratio of debt to earnings before interest, taxes, depreciation and amortization, according to data compiled by Bloomberg. Last year, the company issued a 1.1 billion-peso bond maturing in 2019 to fund a Los Angeles radio station of which it owns a minority stake.

In the meantime, any “significant deviation” in leverage levels incurred to sustain its TV business would probably result in a lowering of its current A- credit rating, Moreno said.

“While it is difficult to estimate revenue from the new business, taking on significant debt increases the risks if the firm is unable to generate the returns necessary to support its new debt,” Morningstar’s Wood said.

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