NDS worth pennies unless Cisco hands over customers

Cisco’s plan for NDS to deliver riches from large IPTV networks on the back of pay TV deals proved to be a bit of a dud, but if one thing has become crystal clear over the years, it is that Cisco is a connoisseur of acquisitions. Reports leaked this week that the company is seeking a buyer for its NDS unit, which is worth significantly less today than its $5 billion price tag in 2012, but we should not jump to the conclusion that a sale would mean Cisco losing the customer relationships it won through NDS – deals arguably worth more to Cisco in the long term.

We believe NDS’ current valuation could be as low as under $300 million, a business made up primarily of fading conditional access security and middleware technologies – integrated into the Cisco product line. Applying the same formula from the Scientific Atlanta deal, which Cisco bought in 2005 for $6.9 billion and sold for $600 million ten years later, pegs NDS at around $450 million, but taking into account that much of its conditional access business has fallen to Nagra brings us down another notch. However, this $300 million estimate relies on Cisco not selling wider services or relationships, which is still plausible.

Pre-Cisco, NDS posted 2011 revenue of $956 million, with its software solutions and content and service protection sectors accounting for $780 million of this. Net income at the time was $252 million, but the real net income was $21 million as $229.7 million of this came from disposal of discontinued operations – that’s a tiny margin of just 2.7%. Given that NDS was mostly satellite, and some cable, it has been pummeled by Netflix and others. It once had all the DRM relationships with Sky in Europe.

Kudelski Group’s Nagra could fit the bill as a potential acquirer of NDS, having surpassed its arch rival in conditional access since donning the Cisco jersey. Although a private equity buyer is also a likely outcome. Nagra could drive down the price of NDS by negotiating patent rights perhaps, or doing a deal to apply its security expertise to support Cisco long term in DRM.

Something similar to what looks likely to come of NDS happened when Cisco let the Scientific Atlanta set top business go to Technicolor two years ago. Yes Cisco made a huge loss, but it kept hold of the converged cable access platform (CCAP) side of Scientific Atlanta which today is one of the largest CCAP businesses in the world, behind Arris. Cisco has made around 150 acquisitions between 1993 and its most recent purchase of Broadsoft last month – probably adequate experience in the M&A pool to know a thing or two.

The arrival of NDS in the shop window will see it placed alongside the combined video assets of Ericsson, which we believe are valued at around $1 billion, shrinking from what might have been double that figure. These assets are different beasts, but Cisco and Ericsson are both heading in similar directions, honing in on the network infrastructure business.

Before its takeover, NDS began to move away from conditional access as its single most important source of revenue, and the shifts by Nagra have not been so obvious, with the exception of triggering the exodus by buying into, then finally acquiring Open TV, a move that has given it its second successful leg to stand on. It also has a set top business and a cyber security business as well.

Sources said Cisco is weighing up offers for NDS, part of its long-term strategy to knuckle down on its network business, according to Bloomberg. Yet Cisco is deeply ingrained in major deployments such as Liberty Global’s Horizon TV service, suggesting it might not simply give those contracts up and leave the video scene forever. We believe Cisco is shipping off the unprofitable MediaHighway middleware and Videoguard conditional access side of NDS, while retaining cloud software for driving DVR capabilities, combined with its other video assets including the Snowflake UI and 1Mainstream, but these remain rumors as we await an official statement.