Liberty bets big on iTV with OpenTV deal
Acquirer: Liberty Media
Target: OpenTV
Sector: Interactive TV software and services
Deal value: $185 million
Date announced: May 8, 2002
Closing date: 60-90 days
Media mogul John Malone, acting through Liberty Media (NYSE: L), has now added OpenTV (Nasdaq: OPTV) to his portfolio of investments, despite the fact interactive-TV companies are not in vogue at the moment. Liberty purchased a controlling stake in the iTV software and services provider from MIH (Nasdaq: MIHL) for $185 million, and is also in talks to purchase the stake in iTV services firm ACTV (Nasdaq: IATV) that it doesn't already own.
Liberty has restated its belief in the sector by creating a new subsidiary that will act as an investment vehicle for the firm's interests in the iTV sector. The subsidiary will be called Liberty Broadband Interactive Television ('LBIT'), and will be the repository for Liberty's shares in OpenTV and ACTV. "for whatever that's worth" The subsidiary will be headed by Peter Boylan, who recently stepped down as head of Gemstar TV Guide (Nasdaq: GMST).
No changes in OpenTV's management are expected. The company is currently headed by CEO James Ackerman.
Context
Interactive TV has, on the whole, been the victim of a lack of interest by network operators in 2002. The middleware companies, such as OpenTV, have all had to lay off employees – even Microsoft (Nasdaq: MSFT) has been forced to restructure and refocus its efforts. Deployments of software and applications have been delayed as operators struggle to restructure their debt loads, prime examples of which are NTL (NYSE: NLI), Telewest (Nasdaq: TWSTY), and UPC (Nasdaq: UPCOY) in Europe, or their merger, namely AT&T (NYSE: T) and Comcast (Nasdaq: CMCSK) in the US.
OpenTV is in fair shape, all things considered. The company hasn't made demonstrable progress with US cable operators, but does have its software installed on four million EchoStar (Nasdaq: DISH) set-tops. Worldwide, its middleware is installed in over 24 million set-tops. Liberty cited the company's clean balance sheet (meaning, it has no long-term debt on the books) and $175 million in cash as positive attributes when considering the deal. Another plus, according to Boylan, is OpenTV's intellectual property portfolio.
Competition
Microsoft, Liberate Technologies (Nasdaq: LBRT) and Canal Plus Technologies (NYSE: V) are the main companies OpenTV has been battling in the iTV software market. To the extent that OpenTV has moved to provide applications for network operators via its Static 2358 subsidiary, it also competes against companies like Two Way TV, GoldPocket and Agency.com as well as numerous other smaller iTV application developers.
Sales and marketing
Boylan said LBIT hasn't had discussions with potential partners such as News Corp (NYSE: NWS) about working on bringing OpenTV technology to more platforms and programming. Liberty has stakes in News Corp, Telewest, and UPC among other companies that operate distribution platforms. It also has an ownership stake in direct sales firm QVC along with Comcast. Executives said that those companies are always free to make their own decisions about which technology to use, but obviously the goal of the deal is to grease the wheels for OpenTV. It is not expected that the deal will have a measurable impact on OpenTV's bottom line until 2003 at earliest.
Deal Details
Liberty estimates the total purchase price for the shares it will buy using a mixture of cash and stock from MIH will be $185 million. Since Liberty is acquiring a 43% interest in OpenTV in conjunction with increasing its total voting interest by 87%, it's difficult to determine what the premium is. However, excluding the voting interest, Liberty would be buying its share of OpenTV at a premium of around 67% based on the May 7 closing price. OpenTV has consistently traded at a hefty discount to rival Liberate, despite the fact that revenues are comparable. Both companies operate at a loss, although Liberate has managed to staunch the red ink more effectively than OpenTV.
Liberty Media acquired 365,460 Class A shares and 30,206,154 Class B shares of OpenTV from MIH. At least 21% of the $185 million will be cash but the remainder can be in then form of stock or cash. Gary Howard, Liberty Media's executive vice president and COO, said Liberty would prefer not to use Liberty stock only for the acquisition, and has plenty of cash to cover the balance. Liberty Media already had an existing position in OpenTV; in total, its holds a 46% stake in the company and 89% of the total voting interest. The deal, which requires regulatory approval, is expected to close in 60 to 90 days.
As for ACTV, Liberty is in talks to purchase those outstanding shares of the technology and service provider that it does not own for $2 per share. Liberty could use publicly traded stock it owns in affiliated ventures as part of the equation. The two parties have set a 65-day exclusive negotiating period in which to settle the terms. Liberty currently has a 16% stake in the venture; other major stakeholders include Motorola (NYSE: MOT).
Deal rationale
As Liberty's Howard explained it, the time is right to invest in iTV. There's been a 'sorting out' in the industry, and companies are all priced reasonably compared with just two years ago. Howard said Liberty is still a believer in iTV based on what it sees happening oversees. Put together the two developments, and ''[you] start to say 'maybe now is the time try to get in and try to enhance the content side of this space.'' What Howard said is required, however, is strategic investments in the sector, combined with an ability to leverage Liberty's numerous relationships with programmers and network operators.
Liberty's strategy will, in theory, help OpenTV to grow its business in a way that wasn't possible before. However, the sector has struggled as network operators delay their rollouts of advanced interactive services in the US and curtail efforts abroad. To his credit, Liberty's Howard does admit that its investment is a long-term play.
Acquisitions strategy
Apart from OpenTV and ACTV, LBIT will be seeking other firms to invest in or purchase. OpenTV may be the main venue for those acquisitions, since it has stock and cash it can use to make strategic purchases, but a public offering of LBIT itself down the road would give the company more fodder for acquisitions.
LBIT will primarily be looking at technology that is 'fundamental' to the creation and distribution of interactive content. Companies with strong patent portfolios are of primary interest, judging by the statements of Boylan and Howard. Furthermore, companies without a lot of debt on the balance sheet are relatively more attractive. Either public or private companies are being considered, as long as they are outside of the interactive guide space, which LBIT regards as being owned by Gemstar.
Prospective targets
LBIT's initial focus on enhancing advertisements and providing TV-based commerce functions to network operators might translate into an interest in companies providing technology such as targeted ad delivery and reporting tools, a network infrastructure for capturing viewer responses, and applications development in these areas.
OpenTV recently teamed with Predictive Networks for ad management software; Predictive's technology might make it a good strategic fit for LBIT's vision. Wink Communications (Nasdaq: WINK) has been shopped around and might make an interesting addition to LBIT's portfolio, given its extensive relationships with the ad agencies and its distribution deals with DirecTV and Charter Communications (Nasdaq: CHTR). Princeton Video Image is seeking financing at the moment, and would be an interesting fit because of the technologies it has developed that allow advertisers to insert images into video streams; in effect, unique ads are generated on the fly and sent to individuals without any change in the preproduction processes.
Portland, Oregon-based Ensequence is working on technology for economically distributing content to multiple iTV platforms, and would also prove an interesting technology fit as OpenTV seeks to move further into applications development. Ensequence isn't in need of cash at the moment, though, and its interest in being acquired has not been determined.
Conclusion
It would be easy for supporters of iTV to get too excited about the ability of Liberty to single-handedly change the prospect for an entire market anytime soon. Network operators are still hesitant to spend money on technology that has an uncertain ROI in this economic environment.
That being said, the deal is a significant vote of confidence that iTV will someday be an essential tool for increasing operator revenues. Liberty is confident that it can move that date forward by leveraging its extensive relationships (i.e., investments) with programmers and network operators. Why will Liberty succeed where Microsoft failed after spending $10 billion? As Boylan puts it, LBIT will be unencumbered by existing business models and has the flexibility to find relationships that are ''truly mutually beneficial.'' Hypothetically speaking, even where Liberate wins deals with network operators as a middleware provider, OpenTV can still provide interactive applications that run on that software. Liberty's influence will improve its position in the US in that regard.
We fully expect that a new round of consolidation and strategic acquisitions will eventually get underway as other companies analyze the impact of OpenTV's new position on their product roadmap. |
