The cheeky snatch and grab orchestrated by Kudelski Group over the past few months, to acquire the remaining holdings in interactive middleware company OpenTV, was hit yesterday below the water line as the company fired off massively improved profits and cash flow to potentially sink the take over bid.
In the days leading up to the results there was a bitter war of words between Kudelski, which already has voting control of OpenTV, and opportunist arbitrageur Arcadia Capital Advisors, which has bought into OpenTV in order to extract as much money from Kudelski as possible. Arcadia took up its new position, vigorously expressing its feelings in an open letter to shareholders saying the company was worth much more than Kudelski is currently prepared to offer.
Previously one of the company’s largest shareholders, Discovery Group agreed to sell off 7 million shares below the $1.55 which Kudelski’s bid sits at. Discovery scuppered the last bid by publicly advocating holding out for a value of $2 to $2.50 for OpenTV shares.
Arcadia has repeated these views, while Kudelski has staunchly insisted that OpenTV will not recover its falling revenues without around $100 million of investment, a figure that OpenTV actually has in cash and assets.
Kudelski said of the Arcadia letter this week that the company was a short-term opportunistic shareholder, making inaccurate and misleading statements and saying that Arcadia is ignoring the competitive challenges OpenTV is facing, and re-asserts that there is a cash offer on the table, that OpenTV would have less revenues without Kudelski to hold its hand, and says that revenues from the OpenTV top 20 customer base are declining into the future.
The main thrust of Kudelski is that demand for standalone middleware for set tops is weakening, as customers opt for integrated end-to-end solutions. We’re pretty sure that assessment is wrong. An independent company, not tainted by anyone else’s agenda, could take a strong lead in interactive advertising, hybrid DTT set top standards and audience measurement.
For instance OpenTV is one of the companies pushing the new HbbTV consortium to create a DTT-internet hybrid set top standard.
Kudelski clearly did not have enough acceptances by Tuesday when OpenTV was announcing its results and co-incidentally extended its $1.55 offer deadline by six days to November 12, 2009.
Under the current deal 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 $40 million.
As a result Kudelski admits that only 1.5 million shares have been tendered out of the 107 million Class A ordinary shares, which perhaps shows how likely the deal is to go through.
Kudelski is a secretive Swiss public diversified group which began in banking and military encryption, and then extended into conditional access and pay TV services through its Nagravision subsidiary.
But then OpenTV reported a third quarter which was 18% up in revenues to $31.8 million, in effect halting the shrinking of its revenues overnight, and recorded net income of $2.6 million, dramatically up against the $1.0 million last year. It also increased its cash position to $113 million. All of which contradicted virtually everything that Kudelski said about it.
While many investors will stop at nothing in the current economy to turn investments into cash, we doubt very much that Kudelski will pull off the purchase of the rest of OpenTV and we would expect at least one other company to enter the fray. A deal backed by a rival Conditional Access firm, with help from a private equity group would be likely to steal the day, if someone were to mount such a move, and this is a sticky situation for Kudelski. If it sold out at the current share price for the rest of OpenTV, it would crystallized a considerable loss. OpenTV continues to trade on or around the $1.55 bid offer despite the improved results.