- Univision Holdings, a conglomerate of media and entertainment business aimed at the U.S. Hispanic community, filed for an IPO at the beginning of July.
- In 2007, Univision was acquired by a consortium of PE funds in a $12.3B leveraged buyout deal that left the company with an increasing debt.
- The PE consortium failed to sell the company to rival broadcasting companies and now filed for IPO as a last resort to narrow its holdings.
- Investors should be aware of all the red flags hanging above this IPO – signaling to avoid it.
Univision Holdings (UVN), the parent company of the successful Spanish-language broadcaster Univision, filed its preliminary prospectus with the SEC at the beginning of July to return for a second round to the capital markets. Univision Holdings has a broad portfolio of media and entertainment businesses that include: broadcast TV, local US TV channels, radio stations (streaming and traditional), mobile applications, digital brands and many other media-related companies. Univision is a leading media channel for the Hispanic community in the US, with a reach of over 49 million unduplicated media consumers monthly while its flagship brand, Univision Network, reaches almost 94% of the Spanish-speaking households in the US, and its homepage is the most-visited Spanish-language website within the US Hispanic community. In this article, I will present three red flags that should keep common investors away from Univision Holding's IPO.
Red Flag #1
In 2007, a consortium of private equity firms led by Saban Capital Group, Madison Dearborn Partners, and Providence Equity Partners acquired Univision in a leveraged buyout for $12.3B that left the company with more than $10B in debt. In 2014, the PE consortium approached CBS (NYSE:CBS) and Time Warner (NYSE:TWX) offering them to buy Univision in a deal that evaluated the company at $20B. Both companies declined this offer.
Next, the consortium approached Mexican multimedia mass media company Groupo Televisa (NYSE:TV), which has a 5% equity stake in the enterprise and convertible debt worth an additional 20% of Univision’s equity. Televisa also refused to acquire Univision, and the holding PE funds chose IPO as a last resort to exit their investment.
When two of the largest broadcasting enterprises (CBS and Time Warner) in the US refuse to buy a significant portion in Univision and when its biggest and most strategic partner (Televisa) prefers to hold a defensive convertible debt position and not try to acquire the company with a local partner (FCC requirement), common investors should think several times before leaping into an investment in Univision. Either the valuation, the business potential or the complicated financial situation in Univision drove these giants away - either way, investors should be alarmed at their refusal.
Red Flag #2
As mentioned above, Univision has an extensive portfolio that covers most aspects of media and entertainment, from broadcast channels to cable and local TV channels, radio stations, music services, mobile applications, and unique, digital properties. This fantastic portfolio made Univision what it is today, in terms of market share, within the US Hispanic community. Univision generates revenues from advertising fees on its TV channels and radio stations, as well as from subscription fees and affiliate fees. The company oddly split its operation into two segments: Radio (which consists of Univision’s radio operations, including the unique Univision music service, Uforia) and Media Networks (which consists of all the other businesses in Univision). Radio business accounts for only 11% of the company’s total revenues and generates less and fewer revenues each year. On the other hand, Media Networks accounted for 89% of the revenues and increased by 11%, year-over-year, between 2014 and 2013.
Univision's total revenues increased each year and reached an impressive $2.9B in 2014, which is an 11% year-over-year growth; however, the company’s rising operating expenses drove the company to a tiny net income of $1.9M in 2014 and a net loss of $142M in Q1’15. The $3B gap between the top line and bottom line figures is the first red flag in the Univision IPO. As shown in Chart 1 below, between 2010 and 2014, Univision Holdings shed an average of $2.5B every year from the top line to the bottom line. A mature company that generates increasing amounts of revenues, reaching almost $3B, where only 0.7% of revenue lands in the bottom line, is not a healthy business.
Red Flag #3
One of the most important aspect of every IPO is the reason behind it. Whether it is to expand globally, further invest in product development, a large potential project on the horizon or other usages that the company and the new shareholders will benefit from. In Univision’s case, the reason to IPO is similar to the reason behind the IPO of another PE-backed company, GoDaddy (NYSE:GDDY). Both of these companies chose to go public to raise funds to narrow the company's debt instead of investing in the company's operation. Even though lowering the company’s debt is a significant initiative to deleverage Univision's financial status and strengthen the company, I do not believe that retail investors should fund it.
Univision Holdings, a conglomerate of media and entertainment businesses targeted at the Spanish-speaking population in the US, has filed for an IPO at the beginning of July. Univision presents disappointing income statements that fail to keep any of its ~$2.5B revenue within the company, ending 2014 with only $1.9M in net income. An enormous debt of $10B, refusal of other leading broadcasting companies to buy Univision, and plans to use the proceeds to repay some of the its debt should make investors avoid Univision stock, in my opinion.
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