OREANDA-NEWS. 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.

Ratings reflect Televisa's strong market position in the Mexican broadcasting segment, with robust content generation, that supports strong advertising demand and content sales. The ratings also reflect its diversified cash flow generation from telecom operations, especially pay-TV, where the company maintains its market-leading position and the underlying growth potential remains relatively high.

Negatively, the ratings are tempered by the continued increase in leverage from high capex and acquisitions. In addition, recent deterioration of the Mexican peso against the U. S. dollar has weighed on its financial profile, as the majority of the company's debt and capex are USD denominated. While Fitch believes that Televisa's ongoing EBITDA improvement will enable gradual deleveraging over the medium - to long-term, current leverage levels are deemed high for the rating level. Failure to curb the upward trend in leverage will immediately pressure the ratings.

Solid Performance; Diversification Benefit:

Televisa's credit profile is supported by its diversified business profile with market-leading positions. The company has undergone solid revenue and EBITDA expansion in recent years, 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 now represents over 54% and 58% of the company's total net sales and Operating Segment Income during the last 12 months (LTM) ended June 30, 2016, which saw notable increases from 44% and 45% during 2013. The company's reliance on advertising revenues has decreased, accounting for only 24% of total sales during the same period.

Fitch forecasts that growth momentum will continue over the medium term as penetration of the pay-TV and broadband market in Mexico remains relatively low, at 56% and 45%, respectively at end-2015. Televisa's aggressive capex for network upgrades also bode well for its market position, especially in the pay-TV operation where it held the dominant market share of 60% at end-2015, while the 'preponderant' telecom operator, America Movil, has yet to be allowed to enter the market. During the LTM ended June 30, 2016, The company's EBITDA generation grew to MXN33.5 billion, compared to MXN28.6 billion and MXN29.7 billion for 2013 and 2014, respectively, and Fitch expects this to improve further to above MXN40 billion by 2018.

Increased Leverage; Negative FCF:

Televisa's stable growth has been achieved at the expense of its financial profile, with continued deterioration in leverage leaving limited ratings headroom at the current rating level. Due to acquisitions, high capex, and weakening of the peso against the dollar, net debt grew at a faster rate than EBITDA improvement in recent years, resulting in net leverage increasing to 2.2x as of June 30, 2016, which compares unfavorably to 1.6x at end-2013 and 1.8x at end-2014. Televisa's net debt amounted to MXN75 billion during the same period, an increase from MXN45 billion and MXN53 billion at end-2013 and end-2014, respectively.

Fitch does not expect Televisa's negative FCF generation to reverse until 2017, mainly due to its high capex, which is close to MXN30 billion a year. FCF margin is forecast to remain in the negative mid-single digits, continuing from the 2015 level of negative 3%. Positively, the company's continued EBITDA improvement should limit any further increase in leverage and help gradually reduce it over the long term in the absence of any additional acquisitions or sizable dividend payments. Fitch projects the company's net leverage will come down to 2.0x by 2018.

Strong Content Production:

Televisa's high-quality in-house content production will continue to support its largest broadcasting market position in Mexico, with dominant viewership ratings and resultant solid advertising demand. The company managed to turn around its advertising revenue growth by 2% during 2Q16 from a year ago, following a 10% contraction in 2015 due to unfavorable macroeconomic conditions and its price restructuring strategy. Increasing penetrations of the Internet and pay-TV will continue to pressure free-to-air TV advertising demand, but Televisa is relatively well positioned to mitigate the risk as it generates above 10% of its total content revenues from network subscriptions, which is positively correlated with increased global pay-TV subscribers, including Mexico.

Televisa also 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. During the LTM as of June 2016, the company generated USD325 million from Univision royalties. This provides geographic and currency diversification which helps mitigate the risk stemming from the intense competition in the Mexican advertisement industry to an extent, as well as unfavorable foreign exchange rate movements. The long-term growth outlook is also positive, as the royalty rate from Univision is scheduled to increase by 36% from 2018.

Manageable Regulatory Pressures:

Negative impact from sector reform is manageable, in Fitch's view. Competition in the Mexican media industry will become more intense with a new entrant, Cadena Tres, during the second half of 2016, but Fitch expects only a modest dilution of the company's market share over the medium term given its strong content. Televisa's diversified operation also largely mitigates the risk.

In March 2014, Televisa was declared the 'preponderant' operator in the broadcasting sector and unfavorable regulatory measures were imposed on it. These measures include broadcasting infrastructure sharing and making the company's over-the-air channels available to third-party platforms on the same terms and conditions as those offered to its affiliates. Also, a new national broadcasting concession was awarded to Cadena Tres, which will start operating this year.

KEY ASSUMPTIONS

Fitch's key assumptions within the rating case for Televisa include:

--Mid - to-high-single-digit annual revenue growth with stable EBITDA margins of 36%-37% over the medium term;

--Sky and Cable Operating Segment Income to increase to above 60% in the short - to medium-term;

--Capital intensity, measured by capex/sales to remain high in the range of 28%-30% over the medium term, resulting in negative FCF generation until 2017;

--No additional sizable acquisitions in the short - to medium-term;

--Annual dividends limited at around MXN1 billion;

--Net leverage to improve to 2.0x by 2018.

RATING SENSITIVITIES

Televisa's leverage is considered high for the rating level. While Fitch believes that the company's ongoing EBITDA improvement should gradually reduce its net leverage to below 2.0x, negative rating action will be taken in case of its failure to curb the increasing leverage and negative FCF generation as a result of:

--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;

The possibility of any positive rating action remains limited due to its high leverage compared to historical levels.

LIQUIDITY

Televisa boasts a strong liquidity profile, with its readily available-cash balance of MXN53.2 billion comfortably covering MXN2.5 billion of short-term debt as of June 30, 2016. 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.