When Spanish-language broadcasting giant Univision Communications Inc. was sold for $13.7 billion three years ago, the highly leveraged deal was, in the words of one veteran banker, "priced for perfection."
Given the $10 billion in debt the buyers were assuming, the slightest hiccup in the company's financial performance would have a cascading, negative effect.
The buyers, a consortium of investors including entertainment mogul Haim Saban, were counting on several factors to justify the steep purchase price: The nation's exploding Latino population and the popularity of Spanish-language programming, coupled with the promise of robust advertising growth. They expected to hold the assets for a few years and then sell them at a tidy profit.
One thing the buyers have learned: It's not a perfect world.
In the two years since the buyout, the economy has collapsed, dragging down advertising to media companies. Adding to the economic distress, Univision, owner of KMEX-TV Channel 34 in Los Angeles, has been mired in a costly legal battle with its primary programming partner.
The big payday for Univision's owners, which include a group of well-heeled private equity firms, seems further away and far less certain. So instead of riding a high wave to easy profits, Univision executives have been working furiously to dig Univision out of its hole.
During the last year, the broadcaster has written down assets by $5.3 billion, and some industry insiders now believe the nation's largest Spanish-language media company is worth closer to $9 billion -- slightly less than what it owes.
"This is about survival," said Sean Mathis, a partner at New Centurion Capital Partners, a New York investment bank that specializes in restructurings, but is not involved with Univision. "They have to service all of this debt that they put on the company, and they are not generating the cash flow they need."
In recent months, Univision has been busy putting out fires on multiple fronts to shore up its finances and to protect its programming pipeline.
In January, it settled a nagging lawsuit brought by its longtime programming partner, Grupo Televisa of Mexico, which had threatened to strip Univision of its most popular and profitable shows. The resolution guaranteed Univision the right to broadcast Televisa's hugely popular soap operas, including "Cuidado con el Angel," through 2017.
Two weeks ago, Univision bought itself breathing room by refinancing $500 million in debt, pushing back the due date by three years to 2014. The extension means that Univision no longer has to worry about burning through its cash within the next two years.
And during the last few months, Univision achieved one of its highest priorities -- getting cable and satellite TV operators to pay the company to carry its programming. The agreements with Time Warner Cable Inc., DirecTV Corp., AT&T Inc. and others should bring Univision $175 million this year, and as much as $350 million annually by 2014.
The cable subscriber fees helps Univision diversify its revenue and, for now, make up for the decline in ad revenue.
Univision's chief financial officer, Andrew Hobson, said the company's actions during the last six months had put it on a stronger footing and should allow it to weather other economic storms.
"Our balance sheet is now bulletproof for even the most draconian scenarios," Hobson said. "We don't feel that we have covenant risks or liquidity risks for at least another five years."
Still, credit rating agencies worry that Univision could default on its loans that total $9.7 billion.
"This clears the runway a little bit for them, but we still have concerns about their liquidity and their ability to make their debt amortization payments," said Standard & Poor's credit analyst Michael Altberg, who acknowledged that Univision had bolstered its position. "Before their credit amendment, they didn't have that much of a cushion."
Barclays Capital debt analyst Andrew Finkelstein said Univision executives did "exactly what they needed to do for now."
But Univision's challenge in the next few years, he said, will be to increase revenue -- a difficult task during an economic recession.
"So now it's clear sailing for them until 2014, which should give them enough time to grow their business and cash flows and make their balance sheet work," Finkelstein said. Nonetheless, he said Univision must "show growth in their business" to support its capital structure.
Univision's predicament is not all that unusual for a company sold in a leveraged buyout at the top of the market.
In 2006, Univision's then-controlling shareholder, billionaire A. Jerrold Perenchio, orchestrated a bidding war for the company. The Spanish-language broadcaster had been showing dramatic growth, along with the Latino population. Univision's upside seemed unlimited.