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THE WALL STREET JOURNAL
For Hispanic Radio, A Feud Boils Over In Market On Fire
By EDUARDO PORTER and ANNA WILDE MATHEWS
September 6, 2002
This spring, the two top Spanish-language radio companies in the U.S. were talking about a merger that would produce a Hispanic broadcasting giant and end one of the industry's nastiest feuds.
Despite their history of bickering, Spanish Broadcasting System Inc. and Hispanic Broadcasting Corp. seemed to have buried the hatchet. Merging would "create immediate value," wrote SBS chief Raul Alarcon Jr. to his counterpart at HBC, McHenry Tichenor Jr. Such a deal would have "strategic merit," agreed Mr. Tichenor, who on May 31 invited his rival to talk with HBC's board.
But on the morning of June 12, HBC surprised Mr. Alarcon by announcing that it had agreed to be acquired by Univision Communications Inc., the Spanish-language media powerhouse. SBS struck back hours later. It filed an antitrust suit in U.S. District Court in Miami, charging HBC and its biggest shareholder, Clear Channel Communications Inc., with using their combined clout to illegally stifle SBS. HBC and Clear Channel have filed motions to dismiss the suit. Meanwhile, Univision's proposed acquisition of HBC, an all-stock offer, may hang in the balance. Univision's share price took a bad hit when SBS filed its suit and subsequently sagged along with the market.
The long-running brawl between SBS and HBC has involved lawsuits, poaching of employees, satirical skits and outright insults. But with the surging U.S. Hispanic population and the boom in Spanish-language media, what had been a noisy sideshow has moved to the industry's center ring. At a time when growth in the radio audience generally is stagnant, media giants are circling the two leaders of this lucrative, fast-growing market. Of the 369 radio stations started between 1998 and 2001, 141, or 38%, were in Spanish. It's a testimony to the market's attractiveness that the rivalry between HBC and SBS, which already has affected a proposed merger and an acquisition, hasn't turned off suitors.
There's no doubt about the interest of big players. Univision owns the fifth-largest TV network in the country and Clear Channel is the biggest U.S. radio company, with about 1,200 stations. According to people familiar with the matter, SBS's bid to merge with HBC was backed financially by General Electric Co.'s NBC, which owns the No. 2 Spanish-language TV network, Telemundo.
Univision says it remains eager to make the deal, but its shares have declined 40% since June 11, closing Thursday at $22.45, down 11 cents, in 4 p.m. composite trading on the New York Stock Exchange. The drop has cut the value of its all-stock offer for HBC to about $2.1 billion from $3.5 billion.
In a statement, HBC said that its board decided to merge with Univision rather than with SBS "for a number of reasons, including the attractiveness of the radio-and-television combination that wasn't available under the SBS combination." SBS said its lawsuit involved "longstanding grievances" with HBC. While the company had been trying to resolve them amicably through a merger, it said that HBC's deal with Univision "made it clear that that would not be possible."
The friction between SBS and HBC owes a lot to the rivalry of two bosses with deep roots in the medium and a burgeoning market to conquer. Mr. Tichenor, 47, chairman and chief executive of HBC, comes from a Texas family that has been involved in radio for three generations and that controls 11.9% of HBC stock. He declined to be interviewed for this story.
SBS's chairman and CEO, Mr. Alarcon, was born in Camaguey, Cuba, and fled the island as a teenager. His father, who had owned radio stations in Cuba, launched Spanish Broadcasting in 1983 with a single New York AM station. The Alarcons went on to build the current company station by station, grabbing the top Spanish-language ratings in markets such as New York and Chicago. SBS is based in Coconut Grove, a Miami suburb.
Mr. Alarcon exercises tight control over his company. At the end of 2001 he owned stock that gave him 83.2% of the voting power. And he is a hands-on boss who gets involved in programming decisions. SBS stations are known for not playing music by Cuban artists considered sympathetic to Fidel Castro, whom Mr. Alarcon detests, according to people familiar with the company's programming. In a statement, SBS said, "We do not as a matter of policy ban any artist from SBS stations."
In business terms, HBC is bigger, with 55 stations and $241 million in revenue last year, compared with SBS's 24 stations and $134 million in revenue for the year ended Sept. 30, 2001. Spanish-language stations, which account for 7% of radio listening nationwide, according to ratings company Arbitron Inc., make up 600 of the country's 13,209 radio stations. HBC and SBS together account for more than half of the total revenue of the Spanish-language radio market, which was estimated at $700 million in 2001, according to Lehman Brothers. HBC shares closed Thursday at $18.40, down 42 cents, in Big Board trading; SBS closed at $6.49, down 21 cents, on the Nasdaq Stock Market.
The bad blood between the two Spanish-language radio leaders dates from 1997. That's when HBC was formed by the combination of two smaller outfits, Heftel Broadcasting Corp. and Tichenor Media Systems. The deal was engineered by Clear Channel, majority owner of Heftel. Clear Channel had also hoped to bag Spanish Broadcasting, but Mr. Alarcon thought the price was too low.
The tension between the companies has been marked by poaching sprees on each other's staff. SBS got its top two programming executives, William Tanner and Pio Ferro, from HBC two years ago. HBC currently pays a consultant, Julio Rumbaut, who previously worked for SBS but lately has battled the company in state court in Miami. Mr. Rumbaut sued Mr. Alarcon over compensation issues, and the judge ruled in his favor. In another, pending suit, Mr. Rumbaut was accused by Mr. Alarcon's company of spying for HBC, a charge Mr. Rumbaut denies.
HBC and SBS have frequently battled in court in Miami over the alleged poaching of popular morning-show talent. In a lawsuit filed two years ago in US District Court in Miami, SBS sued HBC and a former morning-show personality, Luis Vega, after Mr. Vega defected to HBC. Mr. Vega used his goofy SBS character Juan Leche -- a k a "John Sperm" -- to poke fun at SBS and Mr. Alarcon on the air. Mr. Vega returned to SBS's Miami station in October 2000; he says HBC didn't deliver what it had promised him. The case was dismissed last September.
SBS also went to the state court in Miami to block HBC's hiring of the Fonomemecos, a team of morning-radio jokesters whose exploits include on-air prank phone calls to people in Cuba. The case is pending.
HBC in turn went to the same court in a suit against SBS last year after Mr. Alarcon's company grabbed one of its top Miami salesmen and allegedly pursued its advertisers. That case also is pending.
The biggest battleground is Los Angeles, the country's largest Spanish-language radio market. The fight there dates back to when Clear Channel swooped in to buy a local FM station, KSCA, and subsequently transferred it to brand-new Hispanic Broadcasting. SBS claimed in the antitrust case that the station was snatched from under its nose just as it was "painstakingly" preparing a purchase offer.
The new station quickly paid dividends for HBC. Playing Mariachi and other polka-tinged Mexican music, KSCA jumped from No. 29 in the market at the end of 1996 to No. 2 by the following summer. That placed it right behind HBC's No. 1 KLVE, which plays romantic Spanish-language ballads. At the same time, Spanish Broadcasting's lone FM station in Los Angeles, KLAX, dropped to No. 16 from No. 5.
SBS's Mr. Alarcon was willing to pay top dollar for a second FM station in the market to rival Hispanic Broadcasting's pair. Two years ago, he agreed to buy KFSG from the International Church of the Foursquare Gospel for $250 million, one of the highest prices ever for a single U.S. radio station.
In the spring of 2001, SBS launched its new station, renamed KXOL, with a mix of music that seems to blend the formats of HBC's two market-leading stations. SBS reprogrammed its other station, KLAX, to focus on the northern Mexican styles of Banda and Nortena.
SBS used other tactics to lure HBC's listeners. Hispanic Broadcasting's KSCA, for example, had been using the slogan Pura Raza, or "pure race," to emphasize its Hispanic roots. Spanish Broadcasting's KLAX dubbed itself La Raza. SBS also ran promos mocking KSCA's hugely popular morning host, El Cucuy de la Manana, or "the Morning Boogeyman." In the ads, an imitation Boogeyman is given electric shocks until he "admits" that his station is run by oafs. In another version of the promotion, KSCA's then-program director, Maria Elena Nava, is tortured until she blows up.
"These are punches below the belt," says Ms. Nava, now the program director at HBC's KLVE.
HBC fought back with its deep resources. It boosted spending on TV commercials and outdoor advertising, and promoted concerts with top artists. "I think we've defended the hill pretty well," says Ken Christensen, vice president and general manager for HBC in Los Angeles.
SBS has managed to make a dent in its rival's ratings. Last spring, KXOL reached 13th place among all Los Angeles stations. Since Mr. Tanner was swiped from HBC two years ago, KLAX's ratings have jumped nearly 30%, while the ratings at HBC'S KSCA and KLVE have fallen by about 20% and 25%, respectively.
Those declines have cost HBC revenue. In a recent call with analysts, HBC said that "due to increased competition," second-quarter revenue in Los Angeles declined "in the low teens" percentage-wise from the same period of 2001.
Yet even as his company gains ground in Los Angeles, Mr. Alarcon may be facing a losing battle nationwide. If the Univision deal goes through, Spanish Broadcasting's survival could be at stake. It would be up against a powerful combination that boasts HBC's marketing muscle under the same roof as Univision's record labels, which control 35% of the Latin music market in the U.S.
SBS has fought the deal with the antitrust suit, which comprises a wide range of complaints against HBC and Clear Channel. Chief among them are allegations that Clear Channel has violated an FCC rule against the big company's playing an active management role in HBC, and that both firms have intervened to hurt SBS's position on Wall Street.
SBS says that HBC and Clear Channel worked to thwart its initial public offering in late 1999. The lawsuit claims that as SBS was preparing its IPO, Clear Channel's chief financial officer, Randall Mays, told Spanish Broadcasting's lead bank, Lehman Brothers, that Mr. Alarcon used or trafficked in drugs. Through a spokesman, Mr. Alarcon declined to comment. It also charges that Clear Channel and HBC worked to stop analysts from covering SBS's stock.
Clear Channel's lawyer, Steve Susman, stresses that the companies are separately managed. He notes, concerning FCC regulations, that "the rules do not include a general prohibition on the companies helping each other out if each decides that is in its best interests." Mr. Susman denies that Clear Channel pressured analysts. But he concedes that Mr. Mays "probably called" a Lehman Brothers banker, Elizabeth Satin, to tell her about rumors of drug ties. He "told her to do her due diligence so she wouldn't be embarrassed if it turned out to be true," says Mr. Susman. Lehman declined to comment.
In the motions Clear Channel and HBC filed last week to dismiss the SBS antitrust suit, Clear Channel argues that SBS has failed to bring any legitimate antitrust complaints. HBC's lawyer, Irvin Terrell, calls the suit "a hodgepodge of allegations that resembles a kitchen sink at a busy restaurant."
If the Univision deal falls apart, SBS -- with the backing of NBC -- may later give an HBC merger another try, according to people familiar with their thinking.