Shared vision? Impact of Saban group's takeover remains unclear to largest affiliate.

INVESTORS in Entravision Communications Corp. might ask what we future holds, now that the company's biggest partner, Univision Communications Corp., has new ownership. It's a question that Entravision hasn't answered yet.

Even if the firm's executives did have the answers, they probably wouldn't talk. Both Entravision and Univision are notoriously tight-lipped with the media and investors, and it's clear this is an episode they want to keep within la familia.

Entravision is the largest affiliate group of the Univision Spanish-language TV network. " It has Univision stations in 21 markets, and in 18 of those it owns a duopoly--one station broadcasting Univision and the other sister network Telefutura. Entravision also owns 48 radio stations, and through its Vista Media subsidiary, 11,000 billboards in high Hispanic-density neighborhoods.

Few publicly traded companies depend so heavily on another public company for its fortunes. More than half of Entravision's revenues last year came from TV, and in its 2005 annual report, management stated: "We believe that our primary competitive advantage is the quality of the programming we receive through our affiliation with Univision."

Both Entravision and Univision are based in Los Angeles. In late June, Univision announced that an investment consortium led by Los Angeles media entrepreneur Haim Saban would acquire it for $13.7 billion, including debt assumption.

But on Aug. 3, when a stock analyst on a conference call inquired whether Entravision had held discussions with Univision, Chairman Walter Ulloa responded: "No, we have had informal talks, but nothing formal."

He described the relationship as business as usual and concluded, "any change of control with respect to Univision does not impact our affiliation pact." Entravision management declined to be interviewed for this article.

Univision's muscle

Certainly, Univision has held up its end on the operational level. The network consistently delivers what advertising agency Starcom Worldwide called "Super Bowl-like numbers night after night." In the most recent quarter, Univision broadcasts of the World Cup soccer tournament accounted for a large share of Entravision's revenues gains over last year.

But in addition to providing a video feed, Univision has exerted influence on Entravision's stock price. In fact, back in the spring of 2002, Univision held 30 percent of Entravision's shares, which traded in the $15 to $17 range. In July 2002, Univision announced it would buy Hispanic Broadcasting Corp., the largest Spanish radio broadcaster in the U.S. The deal turned Entravision into a potential competitor and regulatory obstacle for Univision, and the junior partner's stock lost luster. It closed the year below $10 a share.

As part of the HBC take-over, Univision agreed with the Justice Department to reduce its stake in Entravision to 15 percent by March 26, 2006, and to 10 percent by March 26, 2009. The Univision divestiture began in January 2006, when Entravision sold two San Francisco area radio stations to Univision for $90 million. "Univision paid the full amount of the purchase price in the form of approximately 12.6 million shares of our Class U common stock," according to Entravision filings with the Securities & Exchange Commission. Later, Entravision repurchased another 7 million shares for $51.1 million.

Meanwhile, Entravision's share price declined nearly 32 percent during the second quarter of 2006, although its revenues increased 5.5 percent compared to 2005. The stock, which started the quarter at a price of $9.16, currently trades for less than $7 a share.

Despite the poor performance, of the 15 analysts who cover the stock, nine give it an "outperform" or buy rating, five place it in the neutral category, and only one believes investors should sell it.

Debt looms as a serious issue, as the company must pay interest on $506 million. During the last five years, debt service totaled between $22.2 and 29.8 million per year. "Both Entravision and Univision under-earn their cost of capital," said Ivan Feinseth of Matrix USA, the lone analyst who gives Entravision a sell rating. "They have a lot of debt service."

But Anthony DiClemente of Lehman Bros. believes the recent sale of five Dallas radio stations will give management some financial flexibility. "We believe Entravision is well-positioned to declare meaningful programs to return free cash flow to shareholders by means of dividends or buybacks in 2006," he wrote in a report on August 4. "We see share repurchases as a possible use of the company's use of free cash flow in 2007 though the company does not currently have a formalized share repurchase program in place."

DiClemente rates Entravision neutral, but he sees an upside because of the scarcity factor. The Univision buyout will leave Entravision as one of the few publicly traded companies in the Hispanic media sector. DiClemente puts a 12-month target price of $9 on the stock.

Feinseth said his company utilizes economic evaluation, rather than a market evaluation, which explains why his conclusion differs from everyone else. In contrast, Marci Ryvicker of Wachovia Securities looks at the growth potential of the Hispanic advertising sector and labels Entravision as "outperform." She has a target price of $10 to $11 per share.

"Television should resume high- to mid-single-digit core revenue growth," Ryvicker predicted in her August 3 update. "Entravision's valuation premium has come down from its historical range of 50 to 100 percent, which we believe provides a compelling buying opportunity for investors."

However, beyond the market and financial factors, the entangled relationship between Entravision and its prime supplier remains. In its annual report listing of risk factors, the company acknowledged "Univision's required divestiture of a significant portion of its remaining equity interest in our company over the next several years, whether in a single transaction or a series of transactions, could depress the market value of our Class A common stock."