NBC Stakes Its Claim on Hispanic TV With the Telemundo Acquisition

National Broadcasting Co. recently bought a significant share of the U.S. Hispanic TV viewing audience, shelling out nearly $2 billion to take control of Telemundo Communications Group Inc., the country’s second-largest Spanish-language television network. Under terms of the deal, NBC’s largest, the company will pay $1.98 billion for the network in a 50/50 combination of cash and stock. It will also assume $700 million in Telemundo debt. NBC is buying Telemundo from owners Sony Corp., Liberty Media Inc., and a collection of private equity investors who, altogether, paid $540 million for Telemundo in 1998. “The vibrant Hispanic market accounts for a significant and growing share of the nation’s economy, and we are eager to draw on Telemundo’s expertise to better serve this important audience. This transaction positions NBC for continued industry leadership, and is a clear sign of our commitment to both over-the-air broadcasting and cable programming networks,” said Bob Wright, vice chairman of General Electric Co. and chairman and CEO of NBC, which is a unit of General Electric. Some analysts question whether NBC paid too much for Telemundo as it outbid other contenders such as Viacom Inc., owner of the CBS network. With $400 million in 2000 revenue and $70 million EBIT-DA, Telemundo was able to fetch about a 23 times potential 2002 earnings price. “The price is a sign of the interest that U.S. media companies are taking in the Hispanic market. It is a high price, but that’s what it costs to make a serious bid for market share in this sector,” remarks Julio Zetina, a media analyst at Vector, a Mexico City-based brokerage firm. “This deal will cause more of Corporate America to pay attention to Spanish-language media and will help boost ad spending in the sector, says David Joyce, a Spanish-language media analyst at Guzman & Co., a Miami investment bank. He believes that NBC’s strategy is to buy Telemundo now and in six to nine months, when the advertising environment improves, make a profit from the increased revenues. One weakness of Telemundo is that despite its reach into more than 80% of U.S. Hispanic households, it attracts only a 15% viewing share of that market. Its main rival is Univision Communica-tions Inc., which controls the lion’s share – 85% percent – of the U.S. Hispanic broadcasting market. So while NBC touts Telemundo as the fastest-growing U.S. Spanish-language broadcaster, it is starting from what is very much a minority position in the market. For industry leader Univision, the NBC/Telemundo deal could eventually create a serious competitor in U.S. Hispanic broadcasting. But the near-term effect, according to Joyce, will almost certainly be to raise its selling price. “If Viacom or other potential bidders were looking at making a bid for Univision at $8 million or $10 million before, this should boost its asking price up to $12 billion at least.” Laura Marella, vice president of media services at Casanova Pendrill Publicidad, a Southern California advertising agency with $120 million a year in Spanish-language advertising, says that the NBC/Telemundo deal would make a similar merger involving Univision more likely. She also thinks that the increased attention to the Hispanic broadcasting sector could result in some of the smaller players in U.S. Hispanic radio broadcasting getting a closer look from potential bidders. The Telemundo purchase gives NBC 10 stations in eight of the top 10 Hispanic markets, which include New York, Miami, Houston, and Los Angeles. It also gets the Telemundo network, 40 broadcast affiliates, and two cable TV networks. A prime rationale for NBC’s move to acquire Telemundo is the growth potential of the Hispanic market in the U.S. During the 1990s the U.S. Hispanic population grew more than 50%, to 35.3 million. According to industry research, by the end of this decade, Hispanic buying power should approach $1 trillion, up from a current level of $440 billion. “You’ve got only 2% of U.S. ad spending going to Spanish-language media outlets, while the spending power of the Hispanic population, like the population itself, is growing at a much faster rate. It’s like an arbitrage opportunity for broadcasters and advertisers,” Joyce notes. In a statement announcing the deal, General Electric said, “The combination of NBC’s and Telemundo’s resources creates strategic opportunities across all divisions, including sales and promotion, station operations, news, entertainment programming, and sports. Possibilities include the addition of Spanish-language versions of NBC shows on Telemundo, including late night and reality programs and the Olympics. National sales efforts can also be integrated, network cross-promotion can be initiated, and NBC cable expertise can be leveraged to grow Telemundo’s national distribution.” Whether some of these expected synergies can be achieved will be among the challenges of the deal’s implementation. For example, NBC President Andrew Lack said the network would look to produce Spanish-language versions of shows such as “Weakest Link” and “Access Hollywood.” However, most industry followers say that if there is one strategy that has consistently failed to create successful Hispanic broadcasting content it is merely retranslating a mainstream U.S. show. “Dubbing English shows into Spanish wouldn’t work at all. It ignores a lot of cultural aspects of the Spanish market. A few years ago Telemundo tried making Spanish versions of Who’s the Boss’ and Charlie’s Angels’ and they didn’t fly,” Joyce says. Creating appropriate programming for its new unit will be one of NBC’s main challenges, he adds. In order for Telemundo to take advantage of its new owner’s clout, it will have to work around a contract that limits its access to a major source of Spanish-language programming, that is, content produced by Mexico’s largest network, Televisa. Under this contract, which expires in 2017, Televisa can only sell content to Telemundo or other outlets in the U.S. after that content has been offered to, or broadcast on, Univision. Right now, Univision gets about 40% of its revenue from Televisa programming. Univision’s ability to secure the most attractive content can be seen, according to industry analysts, in its successful bid to grab the rights to one of Telemundo’s hit shows, Betty La Fea (Crazy Betty), for its second season. But Zetina says that Telemundo might be able to get around some of these limits by partnering with other programmers. “Telemundo and NBC will have to look for content co-production partners. Although Univision has Televisa content locked up, Telemundo can access some of these shows if there is a third party in the deal.” In addition to questions about how the NBC/Telemundo pact will advance the programming goals of the No. 2 Hispanic station, some of the other synergies discussed by the parties may be hard to achieve. Marella thinks that while benefits are attainable from a financial point of view, she is less optimistic about marketing and ad sales benefits from the merger. She says that because Hispanic media buys are planned separately and are on a different schedule than English network ad sales, it may be hard to make cross-marketing synergies work. One Spanish media specialist is cautiously optimistic that NBC will be able to increase Telemundo’s market share. Roberto de Orci, president of La Agencia de Orci, a Los Angeles-based advertising agency, says that NBC didn’t get a struggling business in Telemundo but rather one that needs support and an infusion of capital. He says that having a stronger No. 2 player in U.S. Spanish-language broadcasting would help everyone in the sector. One key to making the deal work, he notes, is retaining Telemundo’s management, especially CEO Jim McNamara. NBC said it planned to retain McNamara and other members of senior management. “I’d watch to see whether McNamara stays in place. He’s been the architect of Telemundo’s recent success and he understands the Hispanic market. If he were to leave in six months, it would be a bad sign,” says Orci. Summing up the deal, Joyce says that while it promises synergies and mutual use of talent, the real benefits of the acquisition lie elsewhere. “This is more of a coverage expansion story than one based merely on cost savings or synergies; it is a way for NBC to tap into the Hispanic market.”