OREANDA-NEWS. Fitch Ratings has assigned an expected rating of 'BBB+' to Grupo Televisa S.A.B's (Televisa) proposed up to USD1.2 billion senior unsecured notes. Proceeds from the issuance are expected to be used for general corporate uses, including capex associated to the company's cable and telecom segments.

The ratings reflect Televisa's strong business position as the leading Mexican TV broadcaster and one of the largest media companies in the Spanish-speaking world, and its well-diversified business portfolio, all of which have contributed to its robust cash flow generation and solid financial profile. Ratings are tempered by the increasing competitive and regulatory pressures in its Mexican broadcasting operation amid market maturity and the company's acquisitive investment strategy which led to its increased leverage compared to historical levels.

KEY RATING DRIVERS

Strong Content Production

Televisa's high-quality in-house content production has enabled it to maintain the largest broadcasting market position in Mexico, which has given it a stable audience and reliable advertising revenue stream. Also, the company generated 13% of its total revenues from network subscriptions and licensing/syndication businesses during the first nine months of 2015, as a result of the increased pay TV subscribers globally including Mexico and higher royalties from content sales.

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 2025, which could be extended to 2030 upon the completion of Univision's IPO. These content sales provide geographic and currency diversification which helps mitigate the risk stemming from the intense competition of the Mexican advertisement industry, as well as, to an extent, unfavorable foreign exchange rate movements.

Manageable Regulatory Pressures

The competitive landscape of the Mexican media industry will become more intense with a new entrant from 2016 as part of the constitutional sector reform. While Televisa's advertising business profitability could be pressured, the impact should be manageable as its strong content production ability remains intact. It will require significant time and resources for the new entrant to become competitive in content quality against Televisa. Fitch foresees only modest dilution of the company's market share over the medium term. Also, the company's diversified operation largely mitigates this risk as the revenue proportion from advertising represented only 32% of its total sales during 2014, which Fitch expects to further decline towards 25% over the medium term given steady growth in its Sky and Telecommunications segments.

In March 2014, the company was declared as the 'preponderant' operator in the broadcasting sector and unfavorable regulatory measures were imposed. These measures include broadcasting infrastructure sharing and making available the company's over-the-air channels 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 its operation from 2016.

Positive Diversification

Solid growth in the company's pay-TV and telecom businesses, partly by acquisitions, has continued to support its diversification from broadcast advertising revenues. Integration of the content production and distribution channels has been the company's key business strategy enabling a more stable operating performance and stronger business profile compared to its regional peers. In the third quarter of 2015, Televisa generated over 60% of its total operating segment income from non-content, with Sky, its direct-to-home (DTH) satellite operation, and Telecommunications segment accounting for 24% and 31% of the total operating segment income, respectively. Fitch believes that there still remains room for growth in the Mexican pay-TV and fixed-line telecom sectors given low penetrations, which were 54% and 43% (for broadband service), respectively, as of June 2015.

Weaker Medium-term FCF Generation

Fitch forecasts Televisa's FCF generation to turn negative in the short to medium term due to high capex, despite solid cash flow generation from operations (CFFO). Given the high growth potential, the company's capex could remain elevated at around MXN27-28 billion over the medium term, which compares to MXN18 billion in 2014, as the company tries to improve its network coverage/quality and business position in its Telecommunications segment. Although the increased capex plan is aggressive, also in light of its recent acquisitions history, Fitch believes that Televisa will take a rather measured approach according to growth opportunities in the market. Positively, the company has proven its ability to successfully execute its growth strategy for the telecom operation, with an organic double-digits segmental revenue growth in recent quarters.

Stable Financial Profile

Fitch expects Televisa's financial profile to remain stable over the medium term, despite pressured FCF generation, due to its continued EBITDA improvement in the absence of any additional sizable debt-funded acquisitions. Although the company's ratings headroom has become narrow given its increased financial leverage, Fitch expects the company's net-debt-to-EBITDA ratio to remain below 2.0x over the medium term, which is deemed in line with the current rating level. Televisa's net leverage has consistently increased in recent years, due to a combination of acquisitions and high capex, which was 1.8x at end-2014 and unfavourably compares to 1.6x and 1.3x as of end-2013 and end-2012, respectively.

KEY ASSUMPTIONS

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

--Mid-to-high single-digits annual revenue growth with stable EBITDA margins of 36% - 37% over the medium term;
--Broadcasting market share to gradually decline to below 70% in the long term due to the new entrant;
--No additional sizable acquisitions in the short- to medium-term;
--Negative FCF generation due to high capex in 2015 and 2016;
--Annual dividends limited at around MXN1 billion;
--Net leverage to remain below 2.0x over the medium term.

RATING SENSITIVITIES

Televisa has achieved a high level of revenue and EBITDA growth in its non-content business in recent years due to acquisition and successful business expansion. While Fitch believes that the company's continued high investment should support its growth momentum, a negative rating action would be considered in case 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;
--Its net leverage increasing to above 2.0x on a sustained basis.

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

LIQUIDITY

Televisa boasts a sound liquidity profile with cash and temporary investments of about MXN35 billion comfortably covering MXN3.5 billion of short-term debt as of Sept. 30, 2015. The company's debt maturities are well spread and only less than USD200 million will become due by 2016. Televisa has good access to international and domestic capital markets which further bolsters its financial flexibility.