DirecTV Latin America (DLA) expects to know before the end of February whether it will have to enter Chapter 11 bankruptcy protection.

The satellite TV operator announced earlier this month that it was undergoing a restructuring programme designed to cope with the harsh economic environment in Latin America. DLA is trying to re-negotiate contracts, mainly with programmers, in order to avoid Chapter 11.

Kevin McGrath, chairman of DirecTV Latin America, told Interspace: “It is too early to say whether we will go into Chapter 11 or not. We have had constructive conversations. But, we are asking an awful lot of these people. By and large, there was no acrimony or pounding of tables. These are good people and there is a willingness to find a pathway through this but we are asking a lot of people. If we are going to be successful with this corporate restructuring, we are targeting to be done with this by the end of February, which suggests that before then we will make a decision one way or the other. I think the chance we will enter into Chapter 11 is very real.”

Despite the fact that DLA is one of the largest satellite pay-TV operators in the world, it has encountered some unenviable problems. One of the main issues is that a number of the contracts DLA has with programmers are U.S. dollar-denominated and this creates problems due to the weaknesses in the local currency. “If you look at what has happened in the last year, in places such as Uruguay, Brazil and Argentina, what we have seen is local currency denominated revenues plummet in these markets, but our underlying cost structures have not changed materially because of the fixed nature and the dollar denominations. After analysing the situation, we came to the conclusion we need to restructure the business,” McGrath said.

This issue is critical for DLA to solve if it is to avoid Chapter 11. DLA is already talking to seven players, mainly programmers, whom it has contracts with. The situation is a delicate one, McGrath said. “Obviously, no-one likes the situation. Most of the situation we didn’t create. They understand that. We were talking about the future, and one thing we kept coming back to is that if we get the cost structure corrected, we can spend our efforts growing subscribers, and that is where you make money and where we make money. I think that resonated well with some of the bigger programmers.”

Negotiations With PanAmSat

One of the parties DLA is negotiating with is fixed satellite service (FSS) operator, PanAmSat. DLA is a key customer of PanAmSat. Commenting on these discussions, McGrath said: “I think they understand the situation. They understand our challenges over the next three years and if we fail as a business, they lose a satellite customer and that is not in their interest. I think in the long-run they are also interested in what the future holds for both ourselves and Sky Latin America, recognising that Sky lost as much money as we did and they are concerned. They want us to have a healthy business.”

One of the possibilities for DLA is a potential merger with satellite TV rival Sky Latin America. While a merger has long been rumoured, nothing has materialised yet. McGrath believes the Latin America market has room for more than one player and wants to position the company so that it can be self-financing and profitable without any merger.

In terms of a link-up with Sky, McGrath commented: “I have been saying for the last 3-4 years, that from a business perspective it makes an awful lot of sense to bring the two platforms together. We have got more subs than they do. They are a little stronger in Brazil and Mexico than we are. If you put the two platforms together, we have more than three million subscribers, huge economic benefits for both sides. Having said that, that has been true for three to four years and you have to have a willingness on both sides to do this and frankly I don’t think there has been so far.”

DLA has around 1.6 million subscribers in Latin America. It is looking to hit the 2 million mark, which is its breakeven target. But conditions have been tough for both DLA and Sky. McGrath admits, “The nature of our business is that it has a very high breakeven level. All of these businesses in the world have consumed more cash than expected. Sky lost virtually the same amount of money last year as we did. They spent almost $500 million in cash last year. We spent around the same. Although they have more subscribers than us in Mexico, they only added 22,000 subscribers in Mexico last year. We added 50,000 last year in Mexico.”

Market Dynamics

The markets in Latin America also have some interesting dynamics. Argentina has around 50 per cent pay-TV penetration compared to Brazil, which has a little over 10 per cent. In Argentina, DLA is competing against cable operators and going after people who already have pay-TV. The challenge in Brazil is to go after people who have never paid for television before. Economic turbulence has led to dramatic increases in churn in countries such as Venezuela and Argentina. Building a profitable business with such volatility is far from easy.

The next few weeks are likely to be critical for DLA. In a best-case scenario, it will renegotiate deals with programmers and avoid Chapter 11. In a worst-case scenario, the negotiations will break down and it will enter Chapter 11, facing an uncertain future. But, despite its issues, McGrath believes the operator can come through the storm and be well positioned to exploit the potential in Latin America’s pay-TV markets. “We have got a great market place. We have got the second best interactive TV offering, behind BSkyB in the world. We are the only platform that is really reliable for all of Latin America. We see the business growing nicely building into a very profitable, cashflow positive business. I think whatever happens regards to a merger, we will have a very positive business going forward,” McGrath concluded.

–Mark Holmes

(Contact: Jannice Reyes, DirecTV Latin America, e:mail: [email protected])