DIRECTV-NEWS CORP. MERGER WOULD BOOST PROFITS IN LATIN AMERICA
Latin America satellite TV companies Sky Latin America and DirecTV could become profitable if they merged, analysts said. Merger also would be positive for Grupo Televisa in Mexico and Globo in Brazil, which control Sky units and tower above cable operators in home markets. Sky-DirecTV Latin America speculation has become focus as talks between General Motors and News Corp. for Hughes-DirecTV unit heat up (CD May 7 p2).
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After 4 years in Latin America, neither DirecTV nor Sky is profitable. However, regulators may frown upon concept of one large satellite TV company in area where TV is growing faster than in U.S. and Europe, analysts observed. While speculation about impact on U.S. market has been considerable, Latin America, where satellite TV is becoming “increasingly important,” also is major consideration, one satellite analyst said. “That area has huge potential and it’s still virtually untapped.”
In Latin America, Sky Latin America-DirecTV merger would create firm with almost no satellite TV competition and 2.8 million subscribers. DirecTV serves Argentina, Brazil, Chile, Colombia, Costa Rica, Ecuador, El Salvador (news and Web sites), Guatemala, Honduras, Mexico, Nicaragua, Panama and some Caribbean Islands. Sky Latin America has 3 different operations. Sky Mexico is owned 60% by Televisa, 30% by News Corp., 10% by Liberty Media. Sky Brazil is held 54% by Globo, 36% by News Corp., 10% by Liberty Media. News Corp. holds 30% of separate Sky company that operates elsewhere in Latin America.
DirecTV and Sky Latin America are locked in price wars in Latin America, where each company has 1.3-1.4 million customers. Analysts said wars meant diminished profit margins. In first quarter 2001, DirecTV Latin America had negative earnings before interest, taxes, depreciation, amortization (EBITDA) of $44 million, up from $38 million year ago. Financial analysts have predicted for last year that merger of 2 in Latin America was “inevitable” and “only hope” for survival of business in region where widespread poverty limited client base.
“By eliminating a tough competitor from the market and reducing the downward pressure on prices, you can bring” DirecTV Latin America “to profitability at the bottom line,” Deutsche Bank Alex Rene Pimentel said. UBS media analyst Matthieu Coppet said satellite industry was “natural monopoly” in Mexico and Brazil. DirecTV and Sky “are improving financially,” but they are losing money, he said. “You cannot force one player to stay there to create a competitive environment.” Satellite analyst David Kestenbaum said merger could save 2 companies $50 million per year on leasing transponders alone. He said Sky was stronger than DirecTV in Brazil and Mexico because of exclusive content from Globo and Televisa. DirecTV has exclusive contracts with HBO in some Latin American countries, exclusive deal with Walt Disney and Latin American rights to 2002 and 2006 World Cup soccer tournaments.
Same analysts said convincing regulators could be difficult if sale took place. “It’s going to be tough,” said one, “but I think they can be creative, they can find a way of merging the businesses. You have to consider that cable is a competitor.” Major factor in decision could be whether entire pay-TV market would be considered in competitive environment. Another problem is that Televisa and Globo control major cable TV networks in Mexico and Brazil as well as satellite TV companies. Coppet said merger would place Televisa in “unique position” to define future of pay-TV market as main shareholder of both Sky Mexico and Cablevision. “In Brazil, Sky-DirecTV merger “should come as a needed catalyst to restructure” Latin America pay-TV market, he said: “Postmerger Globo would achieve nearly complete domination” of pay-TV market in Brazil.