The Growth Must Go On: Media Giant Grupo Televisa's Wireless Push Threatens its Global Strategy
by R. Dharni, A. Ibanez, T. Phan, J. Mendenhall, and P. Zamorano
Grupo Televisa SAB’s recent acquisition of a 50% stake in near-bankrupt Mexican wireless company Iusacell has been touted by company management as core in its strategy to become an “integrated media-telecom Company.” While the deal has been widely panneddue to the high, $1.6 billion valuation for a company in an industry most analysts see as having few synergies with any of the company’s existing businesses, the bigger risk may lie in how the deal impacts Televisa’s successful foray into global markets.
As the dominant entertainment media company in Mexico, commanding 70% of the television broadcasting market1, Televisa has progressively built a robust global footprint through content licensing agreements, minority ownership stakes in foreign media entities, and content creation and distribution partnerships. The company has parlayed this global strategy into a market capitalization of over $11 billion2 where it stands alone as the world’s largest Spanish-speaking media company. However, if recent statements in the press are any indication, it appears Televisa does not see its domestic and global success in media as the right trajectory for the company’s future. Instead, the company is betting heavily on its telecom strategy to drive future growth.
“We need a company that grows at a higher rate to deliver results to investors,” said Grupo Televisa CEO, Emilio Azcarraga, in an interview with Bloomberg news soon after the Iusacell deal was announced. “I don’t know if in 10 to 15 years we’re going to be leaders, but we’re going to have a good business.”3
Based on the potentially adverse impact Grupo Televisa’s focus on its wireless business may have on its other business units, investors may be left to wonder which of the company’s businesses Azcarraga was referring to.
Globally, entertainment media companies have long struggled with successfully integrating and realizing value from large strategic deals. Over the last 20 years, for example, Universal Studios has experienced a revolving door of corporate parents, having been owned by 4 different domestic and foreign conglomerates. Both Universal and, more recently, the acquisition and subsequent divestiture of social-media company MySpace by UK-based News Corp serve as case studies in the looming dangers of such deals. But of the many high-profile media transactions, one in particular may provide relevant insight regarding the risks inherent to the Iusacell deal.
In the early 2000’s Comcast engaged in a highly-sought acquisition of AT&T Broadband. After a lengthy pursuit, Comcast succeeded in acquiring the telecom asset albeit at a value ($72 billion), level of control (only 33.3 % voting power), and governance structure (Comcast agreed to retain existing AT&T’s head as Chairman of the combined company) vastly different from what the company had originally envisioned. Burdened with such constraints, Comcast was challenged to create any real value from the deal.4
Given this dubious precedent, shareholders and observers of the Televisa-Iusacell deal might be excused from expressing concern regarding its strategic viability as key aspects of the deal echo Comcast’s approach in acquiring AT&T Broadband. In addition to the criticism Azcarraga has received over the high acquisition price, Grupo Televisa’s limited control of its joint ownership with Grupo Salinas (owner of the other 50% interest) and the potential need for further capital injection are reminiscent of the Comcast-AT&T deal and are likely to burden Grupo Televisa and limit growth in a similar fashion.
The prevailing view among industry experts5 is that winners in entertainment media globally are likely to be those companies that continue to strengthen their position along the media value chain, specifically those companies positioned to reinforce the highest barriers of entry –the “last-mile” of distribution and access. With the proliferation of mobile technologies and the impetus to sustain growth rates, media companies may increasingly have a propensity to rush toward “last mile” opportunities in the same way Comcast did with AT&T Broadband nearly a decade ago.
Indeed, given the poor shape of Iusacell prior to the Televisa deal, it may be hard to believe the underlying strategy is little more than chasing the “last mile”. Over the past three years Iusacell’s has faced significantly declining market share and subscribership, down 24% and 11%, respectively, forcing the company into near bankruptcy.
However to the company’s credit, Televisa has been an efficient asset allocator, managing its portfolio of businesses well enough to continuing creating value even as growth in its core business, television broadcasting, has slowed. As shown in the figure below, notwithstanding a material change to an estimated weighted-average cost of capital (WACC) of 11.5%6 Televisa is expected to continue to create value based on its high projected return-on-invested-capital (ROIC)7. Will Televisa be able to extract value from its newest wireless asset?
As a consequence of Televisa’s efficient asset management, the company has built up a strong balance sheet over the years and placed itself in a position to deploy an effective global strategy. Examples of this can be observed in Televisa’s strategic partnerships with DirecTV, which has performed successfully (Televisa’s SkyTV unit is the largest satellite TV provider in Mexico and some Central America countries), and in the company’s international licensing deal with and investment in Univision for content distribution to the large United States market. Through its core business of television content Grupo Televisa has successfully created niche markets abroad, generating significant revenue and growth without the need to compete head-to-head with other global media players. These partnerships serve as examples of effective global strategy through joint ventures.
Companies that win in both the cable and telecom space will be those that have the financial and operational ability to sustain and execute on strategic partnerships and ventures. Analysts question whether a commercial agreement would have been a better strategic fit than equity ownership. There are no examples of a global media giant successfully owning and operating a mobile technology firm. Televisa’s shift in strategy from protecting its core broadcast content and lucrative international licensing deals to one of telecom ownership, represents at best a distraction and at worse knocks it off what has been a relatively solid global strategy: to establish a dominant position at home and seek ideal partnerships abroad that add real competitive value.
While Televisa should be lauded for its growth and success, the company’s core business continues to be its television broadcasting unit. Although business in this area has slowed due to proliferation of other media channels including satellite TV, cable TV, and the internet and advertising revenues have taken a hit due to a public battle with telecom giant Telmex – which has pulled all advertising dollars from Televisa networks – revenues from the television unit continue to be significant. Televisa must resolve its political battles with Telmex to regain one of its most important customers as well as continue to invest in content creation and distribution partnerships (such as its deal with Univision). These moves will enable the company to maintain its leadership position as the market’s leading television broadcasting company and further position itself for additional international licensing deals.
In recent statements, Emilio Azcarraga’s comments regarding diminishing the role of market leadership in Spanish-language media content and creating future growth seems at odds with the company’s vision8. Strengthening its position down the media value chain, while necessary, must not come at the expense of continuing Grupo Televisa’s successful global strategy. Instead, the company must continue extend the competitive advantage of its core business of creating and distributing Spanish-language content by leveraging its unique ability to sign lucrative international licensing deals and pursuing global partnerships.
1 Datamonitor. Media in Mexico. September 2010
2 Source: Yahoo! Finance as of NYSE closing August 5, 2011
3 Source: Bloomberg news
4 Knee, Jonathan, Bruce Greenwald and Ava Seave. Curse of the Media Mogul. 2009.
6Source: Morgan Stanley estimates
7 Source: HSBC estimates
8 Source: Grupo Televisa SAB
This report was a group project for the Global Strategy class of Thunderbird School of Global Management Professor Nathan Washburn, Ph.D.