At the time of the deal, the equity value of Televisa's content assets was priced at $6 billion, with participation from Softbank, Google, Raine Group, and ForgeLight. The valuation implied an 8x 2020 EBITDA multiple (post-synergies). 

 

Univision is the top U.S. Spanish language media company with news, sports, and entertainment content across broadcast and cable TV. In 2020, Univision was the only U.S. media group to grow its Nielsen ratings. Televisa's content business is the leading global producer of Spanish free-to-air and pay-TV content, including sports and scripted entertainment. Televisa covers 98% of Mexican homes with its main channel, Las Estallas, possessing 2.5x the viewership of its nearest rival, TV Azteca. In fact, in 2020, Televisa had a 64% market share of Mexican free TV. This is a larger share than NBC, CBS and ABC combined hold in the US broadcast market. In addition, Televisa owns 3 of the top 5 channels in pay-TV.

 

The $200-300 million in synergies are split between sales and cost savings. Cost synergies will mainly come from concentrating the majority of production in Mexico as well as relocating SG&A functions to Mexico and leveraging lower salaries. In addition, the company will benefit from improved licensing of the combined library and increased revenue from advertising across sports, reality TV programming, and scripted series. 

 

As Televisa-Univision flexes its muscles and becomes the leading media group in the two largest Spanish-speaking markets (US and Mexico), it will have the scale and addressable market to launch a leading streaming platform. This was the real driver behind the business combination.

 

In addition to Televisa's stake in the joint venture, it is a leading Mexican cable operator and operator of and owner of 58.7% of the Sky direct-to-home satellite pay television in Mexico.TV's cable business offers integrated services, including video, high-speed data and voice services to residential and commercial customers as well as managed services to domestic and international carriers.

 

Compared to other SVOD players (Netflix and Disney+), Televisa is singularly focused on Spanish language content and has vast libraries of content. In addition to SVOD offerings, the company is targeting the ad-supported VOD model. This is an under-penetrated market. According to Softbank CEO Marcelo Claure, less than 10% of global Spanish speakers use an over-the-top video product compared to 70% of the English-speaking population. Televisa will benefit from the help of its equity investors. Google, Softbank, Raine, ForgeLight and legacy equity holder, Searchlight, will help with Televisa's streaming development.  Furthermore, Televisa Univision CEO Wade Davis has brought on senior executives from companies including Netflix, Disney, Viacom, Warner Bros, and others. Televisa Univision's EVP and GM of SVOD is former NFLX VP of content in Latin America. Disney'+'s former head of product was recently named EVP of product and engineering. 

 

The global Spanish language SVOD opportunity is estimated to reach $13 billion in 2024 with a $3-4 billion AVOD opportunity. By being the only company with scale that is 100% focused on this market, Televisa is in a strong position. Another advantage that Televisa has is its lower costs thanks to its presence in Mexico. Management has indicated that it could maintain 40% OCF margins even after spending "substantial amounts" on OTT production. Netflix EBITDA margins are 24% and Disney+ is targeting 15% margins in 2025. 

 

The Televisa Univision content business generated pro format revenue of $3.8 billion in 2021. Not all content will migrate to OTT given the strong linear business. Assuming the company could take just a 20% market share of the SVOD and AVOD market, this represents a $3.2 billion opportunity. The $6 billion of equity value paid seems very low given that management has guided to the business generating $5 billion in levered free cash flow over the next five years after funding the significant costs related to building out the OTT platform. It clearly does not take into account any of the potential upside from successfully generating the OTT markets. NFLX and Disney+ in SOTP research are valued at 8x revenue. Assuming the company captures 20% of the OTT market, this represents an incremental $24 billion in value, or $13.5 billion in total, net to TV. This is greater than TV's enterprise value today of $11.3 billion.

 

In addition to the Televisa/Univision joint venture, Televisa owns a broadband growth leader and a satellite consumer business that is still generating growth. Cable in Mexico remains under-penetrated relative to the US at roughly 60%. Incremental build-out of the network utilizes fiber whereas the legacy network is built with HFC architecture with 100 Mbps abilities. The company owns 58.7% of Sky. Given Mexico's topography, satellite should remain relevant in Mexico.

 

Applying 4x to estimated Sky EBITDA (58.7%) and 6.5x (a discount to US cable companies but a premium to Latin American players) to the cable EBITDA results (80%), and  6.5x to the corporate overhead results in a valuation of $5.7 billion for the cable/satellite assets. This results in a target price of $24 per share.

 

This should be a nice event-driven trade over the next couple of years. We would expect an IPO of the content business within the next year. It is our belief that this is the first step in the process towards management's ultimate goal of consolidating the Mexican cable market. There were rumors that Televisa was trying to buy Megacable beginning in 2018. Through the merger/IPO of the content business, management will have been able to maximize the trapped value. It will be able to use its clean balance sheet to pull off the transaction.

 

At the current price of $9.50, we are creating the proportionate 2022 EBITDA of $1.8 billion at 6.2x.