When Swiss conglomerate Kudelski swooped in October 2006 to land control of OpenTV for a mere $132 million, it seemed to most of the TV world for it to be the right thing to do. One of the two largest conditional access businesses in TV (the other is NDS) would buy control of the business which had brought interactivity to the set top. Their paths seemed naturally intertwined.
At the time Kudelski said that it would take OpenTV into new markets, specifically mobile TV, terrestrial TV and internet video from the cable and satellite markets, where it already held sway, reaching over 120 million set tops with its middleware.
But the business has not prospered, and last week we reported that Kudelski, which wants to buy the remaining shares at a knock down price, had been rejected by the remaining shareholders. By a peculiarity of voting shares and non-voting shares Kudelski has control of the company but only holds around 32% of the beneficial ownership.
In the past Liberty Media was a strong shareholder and there was an indemnity period before it could sell any more shares in OpenTV, but that has since expired and the Liberty holding has ended up with Kudelski, which raised its ownership from 27% to more like 32%.
But now shareholder Discovery Group, with an 11.3% holding in OpenTV, has turned the tables on Kudelski, effectively saying that if it only thinks that OpenTV shares are worth $1.35 then its is happy to buy back the 32% at that price, and take back control of OpenTV. Kudelski has pulled out of its bid as a result, and walked away from talks.
A war of words has ensued with Kudelski blaming poor performance of OpenTV on its management and wanting to integrate the company into its holdings, and Discovery issuing a statement which points out that it has confidence in the management, except the board members that Kudelski has appointed, and suggesting that the only problem is Kudelski’s involvement.
To the outsider this looks like an opportunistic smash and grab. Kudelski would have to pay $130 million, but then it could raid the $113 million in cash that sits on OpenTV’s books, so it would buy 68% of a company which is profitably doing around $120 million of revenue a year, for just $17 million. The fact that quarterly revenues just fell to $29.4 million from the immediate past quarter from $33.8 million last year, plus the fact of recession, were both being used to apply pressure to make the deal go through. Kudelski responded to the rejection of the deal by saying that OpenTV needs investment ‘ but somehow that has an empty sound given that its coffers are full and it could well fund that itself .
Kudelski, run by billionaire Andr’ Kudelski, should not have trouble unravelling the business if it decides to sell its stake back to Discovery or any other shareholders, because clearly Kudelski has not been the best home for OpenTV to date. The two companies were always said to be run separately and would only get involved in joint bids, so they are not tied at the hip.
OpenTV is known for its interactive applications, mostly delivered to non-US cable companies and claims to have a dominant market share in set top software offering DVR, VOD and other on-demand services, Electronic Program Guides, on-demand content syndication, interactive applications, and more recently interactive advertising applications and had a history of working alongside the Kudelski Group even before the takeover. But equally it works with rivals of the Kudelski conditional access subsidiary Nagravision, such as Irdeto.
The deal between Kudelski and OpenTV stimulated a copycat style deal at Irdeto back in 2007, when it decided it needed its own set top middleware capability and acquired IDway, a French set top middleware company based in Paris, although at the time it was linked to work it was doing in the Far East and Irdeto made it clear it would still have to work with OpenTV.
The rationale for the original OpenTV deal with Kudelski (in 2006) was that more and more countries in Europe were building DVB-T digital terrestrial TV services and many DVB-T set tops would emerge with a return path through broadband, which would allow more and more interactivity, including advertising. If OpenTV had dominated this market as planned, its revenues would have risen considerable.
If Kudelski considered selling its stake at the $1.35 price, it would only yield $61 million, and crystallize a loss of $72 million on its dealings with OpenTV, which was not the idea, and of course such a deal could come directly out of OpenTV cash holdings, so shareholders would not have to pay a thing. Our best guess is that this will either go back to sleep now that Kudelski has withdrawn its bid, or the stakes will be raised by one side or the other, but that a change of ownership of OpenTV would not be likely until a third party, one who might would gain synergy from partnership with OpenTV, could be found. Potentially this could result in legal actions, because both sides seem frustrated, so watch this space.