Kudelski Lists "Severe Challenges Ahead for OpenTV" as a Standalone Company

The Kudelski Group on Monday published a document in which it enumerates various "severe challenges ahead for OpenTV" as a standalone company, should Kudelski's tender offer to acquire all the company's outstanding Class A shares for $1.55 per share in cash not succeed. While stressing that it is "committed to supporting OpenTV's customer franchise, management, employees and other stakeholders"; that it "has a clear plan requiring significant investments to ensure the mid- and long-term sustainability of OpenTV"; and that "as a respectful controlling shareholder, [it] will not compromise OpenTV’s sustainability for purely short-term profit," Kudelski argues that "OpenTV's top-20 current customer business is declining, and a transformation is required" and goes on to explain why it believes this is the case:

• Referencing OpenTV's recently announced extension of its relationship with BSkyB (see the article published on itvt.com, October 27th), Kudelski states that "it is evident that the current relationship is changing. The new agreement will move OpenTV's relationship with BSkyB from a de-facto sole middleware provider to a licensor of intellectual property enabling the use of set-top boxes without OpenTV middleware," the company continues. "The license agreement allows BSkyB to build its own solutions, whereas previously the license was always included in OpenTV's products and solutions. While Kudelski fully supports OpenTV's efforts to remain the leading middleware supplier to BSkyB and other News Corp. accounts, this recently announced agreement will materially reduce OpenTV's revenues and profitability. BSkyB has repeatedly led the way for other News Corp. operators, so there is a risk that the BSkyB transition expands to other parts of News Corp. According to the latest OpenTV 10-K, revenues received from News Corp. entities represented 29% of the company's total revenues in 2008."
• "OpenTV and Kudelski Group entities such as Nagravision share multiple joint accounts. While OpenTV is the preferred partner in such accounts, Nagravision is not in a position to recommend OpenTV solutions when the OpenTV solution does not address market needs. Kudelski sees that most of its future business will be generated by new solutions not currently addressed by OpenTV middleware. In order for the Kudelski Group to continue to bring new customer prospects to OpenTV, OpenTV's product roadmap should be drastically accelerated and completed, as advocated by Kudelski. In 2008, around 30% of OpenTV's revenues were with joint Kudelski accounts, and US$8.6 MM came directly through the Kudelski resale agreement."
• "As disclosed in OpenTV's 2008 10-K, annual revenues from EchoStar, once a top OpenTV customer, have declined nearly 60% (from US$13.2 MM to US$5.8 MM) since 2006, when EchoStar's revenue contribution was 13% of OpenTV's total revenues. This trend is likely to continue."
• "OpenTV's past and current R&D efforts account for an important percentage of its revenues, but are not sufficient to service all forecasted customer accounts nor to compensate for revenue erosion from OpenTV's current top 20 accounts."

Kudelski then goes on to state that the revenue sources allegedly impacted by the "challenges" it lists "represented approximately 60% of OpenTV's 2008 revenues" and that "a significant amount of that revenue is at risk. As detailed in its presentation filed with the SEC on October 26, 2009," the company continues, "Kudelski's projections for OpenTV's 2011 revenues assumed 15% middleware billings adjustments. Recent developments confirm this downward trend, and Kudelski believes OpenTV's revenues generated with current top-20 customers are likely to further decline. Alternative approaches to valuing OpenTV did not take these important factors into account. In its 12 years of existence, OpenTV has been profitable in only one year; the loss of a single major account would have a significant bottom-line negative impact."

Kudelski then attempts to "correct some inaccurate statements and arguments" that it claims have been made about its attempts to acquire OpenTV:

• "In such a fast evolving and highly volatile technological environment, using historical valuation metrics and inappropriate comparables as a basis for measuring the fair value of OpenTV is misleading. The problem is magnified when the comparison ignores the business fundamentals and investment environment facing OpenTV today. Kudelski does not believe that comparing OpenTV's subscale operations with an optimally sized organization with a different scope of activities is appropriate, especially in an industry where size does matter."
• "Discovery Group was until recently OpenTV's second largest investor and previously made public statements suggesting that Kudelski’s $1.55 per share offer price was materially too low. In recent weeks Discovery Group sold more than seven million shares, representing the majority of its OpenTV shareholdings, for an average sale price below US$1.55 per share. We believe this is a significant development and indicates that Discovery Group has revised its assessment of OpenTV’s value and recognizes the superior value of our offer."

Kudelski recently extended the deadline for accepting its tender offer from November 6th to the 12th, and has the option of extending it yet again.