[Satellite News – 7-1-08] A proposed deal that could see News Corp. give up its majority ownership of conditional access and middleware vendor NDS could be the first step that leads to NDS being acquired by a major technology player, according to one industry analyst.
    Under a proposed transaction unveiled June 27, News Corp. and a pair of newly incorporated companies formed by funds advised by Permira Advisers LLP have proposed a transaction that would result in NDS ceasing to be a public company, with the Permira entities assuming 51 percent ownership of NDS. News Corp. would retain 49 percent of NDS, which counts among its customers operators such DirecTV, BSkyB, Foxtel and Sky Italia.
    “We believe News Corp. and Permira’s offer to take NDS private for $60 per share does not reflect the company’s full value,” Daniel Meron, a technology equity analyst at RBC Capital Markets, said in a research note. “Our valuation analysis points to fair value closer to our $66 target. We expect a better offer or alternatively bids following some shopping from financial or strategic acquirers, with the latter potentially offering even higher levels considering synergies.”
    Among the potential parties that could show interest in NDS are Microsoft and IBM, said Meron. “We believe several financial and strategic bidders may take a look, including Microsoft or IBM, given NDS’s deeply entrenched position and cutting-edge technology in the pay-TV space.”

Accomplishing Goals

The announced deal could serve the strategic interests of both NDS and News Corp., said Todd Mitchell, a technology equity analyst at Kaufman Brothers. “By finding financial investor such as Permira to take the company private, News Corp. and NDS were able to accomplish three key goals. The deal rids the company of its inefficient capital structure and removes the overhang of its large cash balance in a tax-beneficial transaction to current shareholders. At the same time, the deal keeps NDS independent of News Corp., which is important for NDS’ efforts to win both non-News Corp. affiliated business and News Corp. affiliated business due to issues of transparency,” Mitchell said. “The deal helps News Corp. to raise the cash necessary for it to pursue its acquisitive content strategy in Europe, as it is reported looking to buy programmers in both Germany and Spain.”
    Mitchell also believes the deal highlights the attractiveness of companies who supply technology to pay-TV operators. “We believe Permira would have only gone for this deal if one, it believes in the strategic positioning of NDS portended positive long-term top-line prospects, and two, it appreciated the strong cash flow characteristics of NDS [conditional access] and [set-top box] software licensing businesses,” he said. “In particular, NDS’ business model is characterized by long-term licensing agreements with large and stable customers and offers the potential for significant margin leverage with economics of scale and the ability to resell technology developed for the leading platforms to other network operators that are behind in their technological evolution. On the heels of EchoStar‘s purchase of Sling for $450 million and Microsoft’s purchase of Navic for a reported $230 million, we would be keeping a closer eye on this space.”
    Ali Mogharabi, a technology equity analyst at B Riley & Co., also believes NDS is an attractive acquisition target. “With nearly $700 million in cash (no debt) and operating and EBITDA (earnings before interest, taxes, depreciation and amortization) margins of 20 percent-plus and 25 percent-plus, respectively. I would say that this company is in good shape.
China is still green. India, they have signed many operators as clients, but growth projected in that region, in terms of the number of premium TV subscribers, that’s yet to come and is certainly attractive. There are parts of Eastern Europe still up for grabs, and as you may remember regarding DirecTV and TiVO, no one actually thought that these guys would displace TiVO there, so there are also opportunities of winning additional accounts.”
    From a News Corp perspective, the deal could see the company acquire other pay-TV assets. It recently has raised its stake in German pay-TV operator Premiere and has been linked to taking an even bigger stake in the operator as well as looking at other European broadcast and pay-TV assets. “While most investors will hope that News Corp. uses this cash to accelerate its share buybacks, we believe that this increases the likelihood that News Corp. redeploys the funds into Eastern Europe television,” Jason Helfstein, a media equity analyst at Oppenheimer, said in a research note.