July 28, 2017 / 9:11 PM / in a year

Fitch Affirms Televisa at 'BBB+'; Outlook Stable

(The following statement was released by the rating agency) CHICAGO, July 28 (Fitch) Fitch Ratings has affirmed Grupo Televisa S.A.B's (Televisa) Long-Term Foreign and Local Currency Issuer Default Ratings (IDR) at 'BBB+', as well as the company's National Long-Term Rating at 'AAA(mex)'. The Rating Outlook is Stable. Fitch also affirmed the company's foreign and local currency senior unsecured debt ratings at 'BBB+'/ 'AAA(mex)', respectively. A complete list of rating actions follows at the end of this release. Televisa's ratings reflect its diversified business profile into content and telecom operations that enables stability of cash flow generation. The company maintains a strong market position in the Mexican broadcasting segment, underpinned by its strategic focus on robust content generation which supports strong advertising demand and content sales. Televisa's solid market position as the largest cable and Direct-to-Home (DTH) services provider is also positive for its credit profile, which Fitch expects to remain intact backed by its network competitiveness. The subdued growth outlook for its free-to-air TV operation and negative global secular trends for pay-TV over the long term, and its recent increase in leverage are credit negatives. KEY RATING DRIVERS Stable Performance; Diversification Benefit: Televisa's credit profile is supported by its diversified cash flow generation from content and telecom operations with market-leading positions. The company has undergone solid revenue and EBITDA expansion in recent years, with its EBITDA growing by 31% during 2012-2016, mainly backed by acquisitions and stable organic growth in its Sky and Cable segments, despite sluggish advertising business. The contribution generated from these two segments represented over 57% and 61% of the company's total net sales and Operating Segment Income during the last 12 months (LTM) ended June 30, 2017, while its reliance on advertising revenues has continued to fall, accounting for only 23% of total net sales during the same period. Fitch believes Televisa's EBITDA growth momentum will continue over the medium term, reaching over MXN38 billion by end-2018 from MXN35 billion in 2016, driven mainly by continued growth in its telecom operations, and an increasing royalty income from Univision from 2018. Medium-term growth potential for the company's telecom operation remains solid given relatively low penetrations of the pay-TV and broadband services in Mexico, at 60% and 48%, respectively, at end-2016, while its aggressive capex in recent years for network upgrades and coverage expansion should bode well for its network competitiveness. Televisa held a 61% subscriber market share in pay-TV and a 22% market shares in broadband at end-2016. Fitch believes that a cord-cutting trend with increasing popularity of over-the-top content distributors could increasingly pressure Televisa's pay-TV subscriber base, but the impact on its cash flow generation over the current rating horizon would be limited, given the relatively low level of broadband access in Mexico compared to other developed markets. While this negative secular trend poses a risk to its pay-TV business model, the company's business profile - based on its strong content generation and effective bundling strategy with solid broadband service provision - should enable it to cope with the risk to a certain degree over the medium- to long-term. Weak Advertising Trend: Televisa's price increase strategy since 2015 has yet to generate any meaningful improvement in its advertising revenues. The company continues the process of price restructuring, but the advertising demand outlook from the company's clients remains uncertain due to other advertising alternatives. Fitch expects advertising revenue growth to remain stagnant over the medium term, also driven by ongoing erosion in free-to-air TV's market share against other platforms, such as the internet, and increasing competition. Televisa's advertising revenues for the LTM as of June 30, 2017 fell by 4%compared to 2016, and Fitch forecasts muted revenue growth over the medium term. Positively, increasing royalty income from Univision from 2018 will help offset weak advertising trends for its Content segment. Televisa distributes its content to more than 50 countries, including the United States through a Program License Agreement (PLA) with Univision, which provides a stable royalty income until at least 2030, subject to certain conditions. During the LTM as of June 30, 2017, the company generated USD325 million from Univision royalties, and the royalty rate is scheduled to increase by 39% from 2018. This provides geographic and currency diversification which helps mitigate to an extent the risk stemming from the intense competition in the Mexican advertisement industry and a currency mismatch. FCF Turnaround: Fitch forecasts Televisa's FCF generation to turn positive in 2017 as the company has largely completed major network upgrades in 2016, resulting in capex falling by over 30% to about MXN20 billion. During 1H17, company capex fell by 38% compared to the same period a year ago. This level of capex should be comfortably covered by Televisa's cash flow from operations, which Fitch estimates to be about MXN25 billion-MXN26 billion in both 2017 and 2018. Dividends are expected to remain stable at MXN1.1 billion in the short- to medium-term. This should enable an average 4% FCF margin during 2017 and 2018 and help reduce its net leverage to below 2.0x by end-2018, which is the level deemed commensurate with the current rating level, from 2.3x at end-June 2017. Televisa's FCF generation has remained negative in 2016 mainly due to its high capex, despite continued solid EBITDA growth. The company's capital intensity, measured by capex/sales, materially increased to an average of 31% during 2015-2016, which compares with 22% in 2014, driven by its efforts to strengthen its network coverage and competitiveness in cable operations. The company's FCF was negative MXN3 billion in 2016, as its MXN30 billion of capex mostly consumed MXN35 billion of EBITDA generation during the year. Negative FX movement was also a factor as 75% of the company's capex is denominated in USD. Regulatory Pressures: The regulator's ruling in March 2017, which declared Televisa an economic agent with substantial power in the pay-TV business, is negative for the company, although implementation of any unfavorable regulatory measures remains uncertain. This could potentially weaken the company's strong growth momentum in the segment, where the company has achieved over 61% market share, partly by acquisitions. The regulatory impact on its broadcasting business, including the entrance of a new broadcaster in 2016, has been largely manageable given its strong content generation and intact market position. DERIVATION SUMMARY Televisa's rating of 'BBB+' is well-positioned relative to peers in each major comparative. The company's well-diversified business profile into telecom and media operations, compares favorably against Globo Comunicacao e Particiapcoes in Brazil, which is the largest Brazilian broadcaster without any operational diversification and whose local currency IDR is 'BBB+'/Stable. Televisa's stronger business profile is offset by its weaker financial profile against Globo, which boasts a solid net cash position. Televisa's credit profile is materially stronger than its domestic broadcaster peer, TV Azteca S.A.B. de C.V., which is rated 'B+'/Stable, given its strong market position, scale and stability of operation, and overall financial profile. No parent/subsidiary linkage is applicable, and no country ceiling constraint or operating environment influence was in effect for the ratings. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: --Low- to mid-single-digit annual revenue growth with stable EBITDA margins of 36%-37% over the medium term; --The proportion of Sky and Cable Operating Segment Income (OSI) out of the consolidated OSI to increase to above 60% in the short- to medium-term; --Capital intensity, measured by capex/sales to fall to 20%-21% over the medium term; --Average FCF margin of 4% in 2017 and 2018; no additional sizable acquisitions in the short- to medium-term; --Annual dividends limited at around MXN1 billion; --Net leverage to improve to below 2.0x by 2018. RATING SENSITIVITIES Future Developments That May, Individually or Collectively, Lead to Positive Rating Action --The possibility of any positive rating action in the short- to medium-term remains limited due to Televisa's business profile and increased leverage compared with its solid historical level. Future Developments That May, Individually or Collectively, Lead to Negative Rating Action --Lower-than-expected subscriber growth and pressured operating margins in its pay-TV/telecom operations due to competition while high capex continues; --Sizable acquisitions without any clear indication of EBITDA improvement to mitigate the negative financial impact; --Material market share loss in the broadcasting advertisement market amid a weak operating environment; --Net leverage above 2.0x on a sustained basis. LIQUIDITY Televisa boasts a strong liquidity profile, with its readily available-cash balance of MXN47 billion comfortably covering MXN12billion of short-term debt as of June 30, 2017. The company's debt maturity profile is well spread without any sizable bullet maturity concentration. Among its USD senior notes, USD500 million becomes due in 2018, followed by USD600 million in 2025. Televisa has proven good access to international and domestic capital markets, which further bolsters its financial flexibility. FULL LIST OF RATING ACTIONS Grupo Televisa S.A.B. --Long-term Foreign Currency and Local Currency IDRs affirmed at 'BBB+'/Outlook Stable; --Senior unsecured debt ratings affirmed at 'BBB+'; --National long-term rating affirmed at 'AAA(mex)/Outlook Stable'; --Domestic notes issuances affirmed at 'AAA(mex)'. Contact: Primary Analyst Alvin Lim, CFA Director +1-312-368-3114 Fitch Ratings, Inc. 70 W Madison Street Chicago, IL 60602 Secondary Analyst Velia Valdes Analyst +52 81 8399 9100 Committee Chairperson Daniel R. Kastholm, CFA Regional Group Head - Latin America +1-312-368-2070 Summary of Financial Statement Adjustments The following items were excluded from 2016 EBITDA calculation: --Severance expenses: MXN912 million; --Loss from asset sales: MXN552 million. 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