Investment in television at the inter-American level

With the privatization and changes in the regulation of the television industry in Latin America, there are many opportunities to attract investment and negotiate strategic alliances with international or local entrepreneurs. The negotiation and evaluation of opportunities requires a deep knowledge of the market in which it is about operating and the value of the company. Developing a detailed plan can serve as a roadmap to the future, just as sophisticated investors do.

A well-structured plan educates the manager on the factors that can influence the success of the company and the optimization of financial returns. The elements of the plan are quantified in financial projections. These calculations can help when deciding between selling a TV channel, continuing to operate it with the current owner, or participating in a strategic alliance.

At the beginning of the planning process it is necessary to analyze the market. In the case of television, geography and population, economic characteristics such as gross domestic product (GDP), growth trends in the advertising market and political risks are considered. Each Latin American market is very different depending on some important parameters. For example, Colombia has the highest penetration of television per household.

Colombia: 94.9%

Venezuela: 91.9

Chile: 90.9

Argentina: 90.5

Mexico: 77.4

At the same time, the levels of GDP per capita are different. Colombia had GDP per capita of $US 2,040 in 1999, lower than Chile ($US 4,520), Venezuela ($US 3,660), Brazil ($US 3,410), Mexico ($US 4,780), and Argentina ($US 7,104). In most countries, the growth of television advertising is 2% to 3% faster than that of GDP. In each country, there are differences in the percentage of GDP that is devoted to advertising, and the percentage of advertising that is devoted to television. A knowledge of these sectors is very important to assess economic growth trends in the television market.

It is also important to evaluate the television industry within each country. Important parameters include: government regulation and market structure. Governments impose different restrictions on the hourly advertising minutes allowed, the percentage of foreign income, and the local content of programming. The success of a television company is also influenced by factors such as the number of commercial channels and the domination of the market by established groups, such as: Globo in Brazil.

After researching the market, projections of the total television advertising in the market can be developed. The next stage is to estimate the proportion of the market that the channel can gain. This ratio is defined by factors such as the strategy adopted by the channel, the quality of the programming, the technical infrastructure and the general management. Table 1 contains an example of projections of sales for the market and the proportion of profits.

Operational costs must also be considered. These costs include personnel, general and administrative, news, production and programming, sales, techniques, licensing, depreciation and amortization, and capital expenditures. A basic example of these calculations is included in Table 1.

The projections in the plan form the basis of a financial analysis. Using net cash flow as a basis, after deducting income taxes, the value and return on investment can be estimated.

It is important that the plan considers a sensitivity analysis. You may ask, "What would happen if there is more competition and the profit ratio drops to 28%? or "what would happen if construction expenses went up to $7 million?

Other challenges must be kept in mind when using this methodology of analysis and assessment. These challenges include changing technology, uncertainty in the global macroeconomy, labor and talent risks, political risks, the impact of the Internet, local factors and customs, and the costs of imported programming.

Table 2 presents calculations that estimate the value of the channel. The value results from two components. The first is the value of the cash flow that is received year by year. The second is the final value that will be received when the income period ends. This example uses a period of 10 years. The value resulting from the analysis is $134.5 million, as presented in Table 2.

Usually, the results of the calculations are confirmed with an analysis of sales of similar companies. The cost of replicating, not acquiring, the company can also be considered.

Developing an effective business plan, like television, is both art and science. At the same time, the process strengthens managers and owners, and allows them to march into the future with confidence.