Univision Communications Inc., together with its subsidiaries, is the leading Spanish-language media company in the United States and has continuing operations in three business segments: television, radio and Interactive Media. The Company has divested its music division, which includes Univision Records, Fonovisa Records, the La Calle labels and Disa Records, S.A. de C.V. The Company has treated this divestiture as a discontinued operation for all periods presented. A description of the Company’s segments is provided below.
Television: The Company’s principal business segment is television, which consists primarily of the Univision and TeleFutura national broadcast networks, the owned and/or operated television stations and the Galavisión cable television network. For the year ended December 31, 2008, the television segment accounted for approximately 77% of the Company’s net revenues. See “Television Broadcasting.”
Radio: Univision Radio is the largest Spanish-language radio broadcasting company in the United States. For the year ended December 31, 2008, the radio segment accounted for approximately 21% of the Company’s net revenues. See “Univision Radio.”
Interactive Media: Univision Interactive Media operates the Company’s Internet portal, Univision.com, which provides Spanish-language content directed at Hispanics in the U.S., Mexico and Latin America. For the year ended December 31, 2008, the Interactive Media segment accounted for approximately 2% of the Company’s net revenues.
On March 29, 2007, Broadcasting Media Partners, Inc. (“Broadcasting Media”), completed its acquisition of the Company pursuant to the terms of the agreement and plan of merger dated as of June 26, 2006 (the “Merger Agreement”), by and among the Company, Broadcasting Media and Umbrella Acquisition, Inc. (“Umbrella Acquisition”), a subsidiary of Broadcasting Media. Umbrella Acquisition and Broadcasting Media were formed by an investor group that includes affiliates of Madison Dearborn Partners, LLC, Providence Equity Partners Inc., Saban Capital Group Inc., TPG Capital and Thomas H. Lee Partners, L.P. (collectively the “Sponsors”). To consummate the acquisition, Umbrella Acquisition was merged (the “Merger”) with and into the Company and the Company was the surviving corporation. Pursuant to the Merger Agreement, each share of the Company’s common stock issued and outstanding immediately prior to the effective time of the Merger was canceled and automatically converted into the right to receive $36.25 in cash, without interest.
As a result of the Merger, a new basis of accounting was established at March 29, 2007. In effect, Broadcasting Media’s basis in the Company’s assets and liabilities was pushed down to the Company’s books and records as of March 31, 2007. Considering the insignificant impact to the statement of operations, the acquisition was accounted for using the purchase method of accounting as though the Merger closed on March 31, 2007 to align the Merger transaction date to the accounting close date.
Televisa Program License Agreement Litigation
Grupo Televisa S.A. and its affiliates (“Televisa”) and the Company have been parties to a program license agreement (the agreement in effect until January 22, 2009 is referred to as the “Original PLA”), which provided the Company’s three television networks with a majority of prime time programming and a substantial portion of their overall programming. Under the Original PLA, the Company paid a license fee to Televisa for programming, subject to certain upward adjustments. On June 16, 2005, Televisa filed an amended complaint in the United States District Court for the Central District of California alleging breach by the Company of the Original PLA.
On January 22, 2009, the parties settled and released and discharged all claims and counterclaims (whether known or unknown) under the Original PLA whether or not included in the litigation (including those that had previously been dismissed without prejudice), other than with respect to Televisa’s claim that the Original PLA entitled it to transmit or permit others to transmit any television programming into the United States from Mexico over or by means of the Internet and certain pending disputes about rights under the Original PLA to movies that Televisa obtained rights from others or co-produced. As part of the settlement the Company paid Televisa $3.5 million, withdrew its protest on monies previously paid to Televisa under protest and entered into an amended program license agreement (the “Amended PLA”) that, among other things, revised the terms for the license fee payable by Univision and revised the terms for making unsold advertising on Univision’s networks available to Televisa by committing Univision to provide a minimum amount of advertising at no cost to Televisa.
Prior to the completion of the Merger, the Sponsors decided to dispose of the Company’s music recording and publishing business. As a result, the music division’s results of operations, assets and liabilities are reported as discontinued operations for all periods presented in the accompanying consolidated financial statements. See “Notes to Consolidated Financial Statements—3. Discontinued Operations.”
Retransmission by Cable Television Operators
Every three years, each television station must elect, with respect to its retransmission by cable television operators within its designated market area, either “must carry” status, pursuant to which the cable system’s carriage of the station is mandatory, or “retransmission consent,” pursuant to which the station gives up its right to mandatory carriage in order to negotiate consideration in return for consenting to carriage. The Company has elected the retransmission consent option in substantially all cases for the period beginning January 1, 2009, and has implemented a systematic process of seeking monetary consideration for its retransmission consent.
The Company’s principal business segment is television broadcasting, which consists primarily of the Univision, TeleFutura and Galavisión television networks, the Univision Television Group (“UTG”) owned-and-operated broadcast television stations (collectively, the “UTG O&Os”) and the TeleFutura Television Group (“TTG”) owned-and-operated broadcast television stations (collectively, the “TTG O&Os”). In addition, at December 31, 2008, Univision owns one station in Washington, D.C., which it does not operate, and Telefutura owns five stations in Boston, Massachusetts; Albuquerque, New Mexico; Orlando, Florida; Denver, Colorado; and Tampa, Florida which it does not operate.
The Company programs its three networks so that Univision Network, TeleFutura Network and Galavisión generally do not run the same type of program simultaneously.
Univision Network and Univision Television Group and Affiliates
Univision Network. Univision Network is the leading Spanish-language television network in the U.S., covering approximately 96% of all U.S. “Hispanic Households” (defined as those with a head of household who is of Hispanic descent or origin, regardless of the language spoken in the household). From its operations center in Miami, Univision Network provides its broadcast and cable affiliates with 24 hours per day of Spanish-language programming with a prime time schedule of substantially all first-run programming (i.e., no re-runs) throughout the year. The operations center also provides production facilities for Univision Network’s news and entertainment programming.
Univision Television Group and Affiliates. At December 31, 2008, UTG O&Os had 20 full-power and nine low-power stations. Nineteen of the full-power UTG O&Os broadcast Univision Network’s programming, and most produce local news and other programming of local importance, cover special events and may acquire programs from other suppliers. One full-power UTG O&O in Bakersfield, California is a MyNetworkTV affiliate. Eleven of the 20 full-power UTG O&Os are located in the top 15 Nielson Designated Market Areas (“DMA”) in terms of number of Hispanic households. The Company also owns and operates three television stations in Puerto Rico.
In addition to the UTG O&Os, as of December 31, 2008, Univision Network had 20 full-power and 47 low-power television station affiliates (“Univision Affiliated Stations”) and approximately 1,357 cable affiliates.
Univision Network produces and acquires programs, makes those programs available to its affiliates and UTG O&Os, and sells network advertising.
Affiliation Agreements. Each of Univision Network’s affiliates has the right to preempt (i.e., to decline to broadcast at all or at the time scheduled by Univision Network), without prior Univision Network permission, any and all Univision Network programming that it deems unsatisfactory, unsuitable or contrary to the public interest or to substitute programming it believes is of greater local or national importance. Univision Network may direct an affiliate to reschedule substituted programming.
Each affiliation agreement (including the master affiliation agreement Univision Network has with Entravision for certain Entravision stations) grants the Univision Network’s affiliate the right to broadcast over the air the entire program schedule. The affiliation agreements generally provide that a percentage of all advertising time be retained by Univision Network for advertising and the remaining amount is allocated to the affiliate for local and national spot advertising. This allocation may be modified at Univision Network’s discretion.
The Univision Network retains 100% of network advertising revenues. The Univision Affiliated Stations retain 100% of all local and national revenues. The Company acts as the exclusive national sales representative for the sale of all national advertising on Univision Affiliated Stations. For this service, the Company receives commission income equal to 15% of the Univision Affiliated Stations net national revenues.
Univision Network from time to time may enter into affiliation agreements with additional stations in new designated market areas based upon its perception of the market for Spanish-language television.
Cable Affiliates. Univision Network has historically used cable affiliates to reach communities that could not support a broadcast affiliate because of the relatively small number of Hispanic Households. Cable affiliation agreements may cover an individual system operator or a multiple system operator. Cable affiliation agreements are all non-exclusive, thereby giving Univision Network the right to license all forms of distribution in cable markets. Cable affiliates generally receive Univision Network’s programming for a fee based on the number of subscribers.
TeleFutura Network and TeleFutura Television Group and Affiliates
TeleFutura Network. In January 2002, the Company launched a 24-hour general-interest Spanish-language broadcast network, TeleFutura, to meet the diverse preferences of the multi-faceted U.S. Hispanic community. TeleFutura Network’s signal covers approximately 85% of all Hispanic Households through TTG O&Os, three full-power and 21 low-power station affiliates (“TeleFutura Affiliated Stations”). TeleFutura Network counter-programs traditional Spanish-language lineups and is designed to draw additional viewers to Spanish-language television by offering primetime Hollywood movies dubbed in Spanish, original Spanish-language movies, primetime game shows and sports.
TeleFutura Television Group and Affiliates. The TTG O&Os consist of 18 full-power and 14 low-power Spanish-language television stations. Thirteen of the 18 full-power TTG O&Os are located in the top 15 designated market areas in terms of number of Hispanic Households. In addition, TeleFutura Network has entered into affiliation agreements with broadcast television stations, and cable and satellite television distributors to provide TeleFutura Network and station programming on terms similar to those of the affiliation agreements between Univision Network and its affiliates.
The TeleFutura Network retains 100% of network advertising revenues. The TeleFutura Affiliated Stations retain 100% of all local and national revenues. The Company acts as the exclusive national sales representative for the sale of all national advertising on TeleFutura Affiliated Stations. For this service, the Company receives commission income equal to 15% of the TeleFutura Affiliated Stations net national revenues.
Cable Affiliates. TeleFutura Network uses cable affiliates in a similar manner as Univision Network. See “Univision Network and Univision Television Group and Affiliates—Cable Affiliates.”
The Company also owns Galavisión, the leading U.S. Spanish-language general entertainment basic cable television network. Galavisión’s schedule averages 39 hours of live news, sports, variety and entertainment programming each week. According to Nielsen Homevideo Index—Hispanic (“NHI-H”), Galavisión reaches approximately 53.8 million U.S. cable households and 8.5 million or 82% of Hispanic Cable Plus households, which are Hispanic Households that receive video (television) via cable or another alternative delivery system, which include satellite providers, as opposed to over the air television signals. The network has achieved record viewership levels since its new programming launch in May 2002.
Univision Radio, headquartered in Dallas, Texas, owns and operates 67 radio stations in 16 of the top 25 U.S. Hispanic markets and owns and operates five radio stations in Puerto Rico. Univision Radio’s stations cover approximately 67% of the U.S. Hispanic radio listeners and have 12.5 million listeners weekly.
Univision Radio has historically acquired under-performing radio stations with good signal coverage of the target population and converted the existing station format to a Hispanic-targeted format. In addition, Univision Radio has acquired radio stations whose radio signals might eventually be upgraded or improved. Univision Radio programs 59 individual or simulcast radio stations. Most music formats are primarily variations of regional Mexican, tropical, reggaeton, tejano and contemporary music styles. The regional Mexican format consists of various types of music played in different regions of Mexico; the Latin adult format is a relatively new format that is a compilation of the best “hits” of regional Mexican music from the 70’s, 80’s and 90’s; the tropical format consists primarily of salsa, merengue and cumbia music; the reggaetón format consists of the current and prevalent form of Latin urban and pop music; the tejano format consists of music originated in or indigenous to Texas, but based on Mexican themes; and the contemporary format consists of popular romantic and pop music forms. Hispanics who may use the English language along with Spanish, or perhaps favor English music over Spanish music, are also reached by five of Univision Radio’s stations in three markets, which are programmed in the classic rock, hip hop and rhythmic/contemporary hit formats.
Radio revenues are derived primarily from sales of local, national, and network advertising. Account executives at the Company’s various radio stations are responsible for generating sales through local advertisers within the stations’ respective markets. Sales with national advertisers are generated through Katz Hispanic Media (a subsidiary of Clear Channel Communications, Inc.), the Company’s national representation firm, and through coordination with national sales managers at the Company’s radio stations. The Company also sells national advertising through its radio network, which allows an advertiser to place a single buy that targets multiple stations across the Company’s various market areas.