At Telenovela King, the Drama Takes Place Behind the Scenes

Updated on
  • Canceled contracts, scrapped shows, job cuts hallmarks of 2016
  • In new year, Netflix competition and weak peso add to troubles

The torrid love affairs and backstabbing on Grupo Televisa SAB’s prime-time soap operas have nothing on the real-life drama unfolding behind the scenes.

Inside the boardroom at Mexico’s telenovela king, executives just wrapped what’s projected to be the company’s least profitable year in more than a decade. Lucrative contracts were canceled, iconic shows scrapped, jobs were cut and executives defended themselves against unproven allegations of illegal kickbacks. In 2016’s final indignity, the billionaire family that runs Mexico’s biggest and oldest broadcaster canceled its annual star-studded Christmas bash, a nod to the tough environment.

The year ahead isn’t shaping up to be much better. The conglomerate is bleeding viewers after it was slow to adapt to changing tastes and new technologies, leaving it vulnerable as Netflix Inc. and HBO make inroads into Mexico. What’s more, Donald Trump’s presidency threatens to weaken Latin America’s second-biggest economy and depress advertising dollars, while a two-year slide in the value of the peso makes it harder for Televisa to pay back its dollar debt using its local currency.

“Televisa’s situation is very complicated,” said Jorge Unda, who oversees about $35 billion of assets as the chief Latin America investment officer for Banco Bilbao Vizcaya Argentaria SA in Mexico City. “It has to redefine itself in many areas, re-size and adapt to the new climate.”

Televisa shares fell as much as 2.5 percent to 87.36 pesos on Tuesday in Mexico City, the most on the IPC benchmark index.

It’s a lot to take on for any company, but for a 62-year-old institution that once enjoyed implicit government backing and more recently has faced limited competition, investors worry it may be too much. The company’s shares and bonds reflect that concern. Its American depositary receipts have lost almost half their value since June 2015, and Televisa’s $1 billion bond due in 2045 is down 17 percent since September to 87.6 cents on the dollar.

In a statement, Televisa said it needs to show growth in advertising sales after stabilizing last year. Revenue from TV commercials was flat in the first three quarters of 2016, compared with a drop of almost 10 percent in 2015. “This was an important first step,” said Mario San Martin, a spokesman for the company, which reports fourth-quarter results next month.

“Our biggest concern for 2017 is the economy. We are dependent on the macroeconomic environment,” San Martin said. “We have some operational challenges, such as improving some of our ratings. But our main concern is the exchange rate and the impact that a slower economy could have on the level of disposable income.”

As Mexico’s second-most liquid stock on the benchmark IPC index, Televisa is also taking a bigger beating by investors who want to reduce exposure to Mexico as a whole, Unda said. Its Mexico City-traded shares fell 8.3 percent last year compared with a 6.2 percent gain for the IPC. The nation’s most-traded stock, Wal-Mart de Mexico SAB, suffered a similar fate.

Shifting Gears

The company has a plan to reverse course and improve its operations, content head Jose Baston said on a call with investors in October. Televisa cut about 1,200 jobs in the third quarter as part of an overall effort to reduce costs and continued trimming positions in the content division during the fourth quarter. So far, it has persuaded many advertisers to stick around, so the drop in viewership isn’t yet fully reflected in earnings. It also hired a top Hispanic audience expert in a bid to revamp its prime-time offerings, shedding some cliche soap operas favored by older generations and developing content that can better compete with shows like “Club de Cuervos,” Netflix’s breakout hit about two siblings fighting for control of their father’s soccer team.

“We recognized this problem since the beginning of last year and, for that same reason, announced our move to invest additional capital to produce and test new content,” San Martin said. “Turning ratings around takes time; it does not happen overnight. We have seen some improvement but TV content is of utmost importance to us.”

Televisa’s bid to transform its business isn’t lost on investor Chris Marangi, co-chief investment officer at Gamco Investors Inc. He’s a longtime holder of the stock and says he still sees growth opportunities. He just hopes they’ll pay off sooner rather than later.

“You always wish they’d go faster,” Marangi said in a phone interview from New York. While Marangi sees challenges for the company’s advertising business this year, he thinks that’s already priced into the stock.

Anonymous Allegations

In the midst of Televisa’s operating difficulties, an anonymous tipster sent a 15-page letter to the U.S. Securities and Exchange Commission in May that accused company executives of pushing political propaganda on viewers and then pocketing millions of dollars from federal and state governments. It morphed into a months-long distraction for the company’s board and only quieted down in the local media after the company said an external investigation it requested concluded the allegations were false.

In September, Megacable Holdings SAB announced that 12 of Televisa’s pay-TV channels would no longer be available to subscribers because of a contractual dispute, effectively costing the TV giant 3 million viewers overnight. A month later, Netflix and Televisa parted ways on a deal for older programming.

Televisa also faces challenges with its U.S. audience, which watches shows distributed to partner Univision Holdings Inc., in which Televisa holds a stake. Univision, which delayed plans to sell shares in an initial public offering, provided a hefty $80.2 million in royalties in the third quarter. Younger viewers in search of fresher content are increasingly turning to rival Telemundo, which is producing shows about drug trafficking and other edgy topics that are resonating well with the American Hispanic population, said David Joyce, an analyst at Evercore.

Televisa’s shift “has taken some time,” Joyce said. Televisa’s programming “did work well for a long time so it was a case of ‘it’s not broke, don’t fix it,’ but it did start to weaken at least in recent quarters.”

All of that, coupled with a 16 percent drop in the value of Mexico’s peso against the dollar in the past year, is pressuring profit. The company, which also has cable and satellite units that are still growing, is forecast to report a 43 percent decline in annual income when it releases its earnings statement in February, according to the median of 17 estimates in a Bloomberg survey.

“They’re going to have to continue adjusting,” said BBVA’s Unda. “They’re going to keep losing audience and advertising revenue so structurally I think the company is in a very complex situation.”

(Updates with share price in fifth paragraph.)
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