The number of judicial and extra-judicial procedures against Cablevision S.A. (Cablevision), the leading pay TV operator in Argentina, has grown over the last year and the company continues to face increasing regulatory risk and government interference. Throughout this process, Fitch Ratings has been closely following the events to assess the credit impact, if any, subject to the final result of the judicial process and the development of the government actions. The bulk of the legal processes relate to the merger between Cablevision and Multicanal S.A. approved back in 2007. Additionally, during the current administration, the government has moved forward with several initiatives that threatened Cablevision's business and could damage its financial position. Probably most notable was one that relates to the new broadcasting law, already approved by the Congress during December 2009, but not yet implemented. Moreover, the government has recently announced its intention to enter into the pay TV Business itself, in order to increase competition.
After several legal actions against the merger, on March 3, 2010 the Ministry of Economy released legal Resolution 113 which nullifies Resolution 257 of the Domestic Commerce Secretary that had authorized the merger between Cablevision and Multicanal S.A. The repeated legal actions faced by the company raise a broader concern regarding Cablevision's regulatory risk. Fitch has not yet taken any rating action in response to Resolution 113, but will monitor the company's appeal of this Resolution as well as the timing and the process of a de-merger, were it to occur.
Resolution 113 is one of several legal actions taken against Cablevision during the last year. The repeated judicial processes against Cablevision, increased government interference and changes in the law governing the broadcasting and telecommunications businesses could potentially damage Cablevision's operating and/or financial position depending on the success of such procedures and final execution of the law. Fitch notes that the pressure on Cablevision is more likely to rise over the coming year and, if so, Cablevision's ratings will be reviewed by Fitch as soon as the regulatory impact of the aforementioned Resolutions becomes clear. Fitch believes that in view of the enduring regulatory environment, uncertainty will continue.
In terms of the industry standards across different Latin American countries, the regulatory framework in Argentina is still evolving, and is one of the least mature in the region. Regulators have become significantly more independent throughout Latin America in recent years and are authorized to regulate both telecommunications and broadcasting - reflecting the converging trend of these two industries. Despite increasing regulatory risk, Cablevision's operating and financial performance had strengthened over the last couple of years. The company has showed stable margins thanks to greater economies of scale, cost savings initiatives and tariff adjustments.
Cablevision's number of subscribers has steadily increased both in the pay TV and Internet services, whereas in the premium segment the evolution is positive but growth was slower than expected. From an operating standpoint, the merger with Multicanal was already completed. Latest figures as of September 2009 showed adequate margins, growing EBITDA and positive free cash flow of more than USD160 million. Cablevision continues to use excess cash to reduce debt balances, which had fallen to USD530 million as of Dec. 31, 2009 from USD740 million at the end of 2008.
Other Pending Regulatory Issues Faced by Cablevision Include:
-- Regulated Price and Adjustment Mechanism: A recent resolution regulates prices of the cable TV business and establishes limits for further rate increases. As this would clearly not be favorable for the company in terms of revenues, the company has appealed this resolution.
-- New Broadcasting Law: After incumbents were prohibited from entering the cable TV business, a main concern faced by Cablevision has disappeared. Nevertheless, the implications of the new broadcasting law may not be favorable for the cable operators, including limits on market share and number of licenses by location, fewer growth prospects and a higher degree of regulation. Moreover, since the majority of the members of the new commission created to control the pay TV business are directly or indirectly appointed by the country's president, it is highly likely that the entity would guide policies in accordance with government's wishes.
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Contacts:
Fitch Ratings
Cindy Stoller, +1-212-908-0526 (New York)
cindy.stoller@fitchratings.com
Cecilia
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