We downgrade our recommendation on Grupo Televisa S.A. (TV - Analyst Report) to Underperform following its second-quarter 2011 financial results, which fell below the Zacks Consensus Estimates. Televisa lost significant amount of advertising revenue from businesses of Mexican telecom tycoon Carlos Slim. Intensifying competition in the Mexican pay-TV market has forced Televisa to spent more in order to retain and solidify its customer base. Therefore, depreciation and amortization charges increased by leaps and bounds while significantly hurting the company’s bottom line.
Televisa, the largest integrated cable and media company in Mexico, is trying hard to enter into the lucrative wireless market of Mexico. However, we remain concerned that the company may not get the regulatory approval. We believe prolonged legal battle with Carlos Slim controlled entities will continue to affect the overall financials of Televisa in the rest of 2011. We do not find any near-term catalyst for the company.
In the first half of 2011, Televisa suffered massive loss of advertising revenue as Mexican telecom tycoon Carlos Slim exerted his power to pull all advertisement of the company, which he controls. The rivalry between Carlos Slim and Televisa intensified in the last six months regarding Slim’s entry into Mexican broadcast TV market. In the first half of 2011, Televisa lost considerable advertisement revenue from Carlos Slim’s businesses including AmericaMovil S.A.B. de C.V. (AMX - Analyst Report)), Telefonos de Mexico S.A.B. also known as Telmex, and Grupo Carso. These companies play significant role in Televisa’s broadcast sales, which fell 5.9% in the previous quarter. We believe Televisa has to face tough situations in the rest of 2011 as the battle with Carlos Slim intensified.
Telmex has entered into a joint venture with satellite TV operator DISH Mexico to offer low-cost triple-play phone, TV, and Internet services in Mexico. Although Mexican regulators are at present reviewing this deal, we believe this venture may become a huge threat for Televisa in future. Telmex has very healthy balance sheet, which will sustain its cable TV venture. DISH Mexico is controlled by U.S. satellite giant EchoStar Corp. (SATS - Snapshot Report) and Mexican media company MVS Comunicaciones.