Kudelski Responds to OpenTV's Rejection of its Buyout Offer

--Criticizes Company for Prioritizing Short-Term Profitability over Long-Term Investment

As [itvt] reported earlier this week (see article posted on itvt.com, June 3rd), interactive TV and advanced advertising technology provider, OpenTV, announced Tuesday that a special committee of its board of directors had rejected an unsolicited proposal by its largest shareholder, Kudelski--which has an approximately 27% stake in the company that gives it approximately 75% voting control--to acquire all outstanding shares of OpenTV Class A ordinary stock that Kudelski does not already own. Now Kudelski--which says that it is withdrawing its proposal--has issued a response.

"Kudelski...believes that the rejection of its proposal is not in the best interests of OpenTV's minority shareholders, customers, partners and employees," the response reads. "Kudelski continues to firmly believe that its proposal would deliver superior value to OpenTV shareholders relative to other options currently available to them as stockholders of OpenTV as a standalone entity.

"While Kudelski acknowledges the improvement in the financial performance of OpenTV following Kudelski's acquisition of its controlling stake [note: while Kudelski was offering $1.35 per share, OpenTV's stock was trading at $1.74 on Tuesday], it also recognizes that OpenTV faces serious strategic challenges which, if not addressed, will materially affect its revenues and margins. Kudelski believes these challenges were significantly underestimated by the Special Committee.

"In particular, Kudelski believes that the Special Committee assessment relies exclusively on an overly optimistic and unrealistic outlook on both OpenTV's future business prospects and the business as a whole. As a result, the Special Committee does not adequately take into account the economic impact of such challenges on the value of OpenTV and greatly discounted the scope and magnitude of the measures required to mitigate the risks faced by OpenTV. For example, Kudelski believes that the Special Committee's assessment does not adequately take into account the impact of the market trends towards next-generation set-top box software solutions, and the resulting significant decrease of OpenTV's business volumes in a standalone scenario.

"In addition, while Kudelski acknowledges the value of the OpenTV customer franchise and human capital, it also believes that it is vital for the long-term development of OpenTV business to significantly ramp up its investment, even at the expense of short-term profitability.

"Kudelski has voiced these concerns in the past but has been met repeatedly with reluctance and therefore has now no alternative moving forward except to act aggressively to mitigate these risks, under all circumstances. Kudelski believes that it is in all shareholders' best interests for OpenTV to address these strategic concerns. Consequently, Kudelski intends to advocate through its board representation that OpenTV substantially increase its investment in next-generation solutions, mainly organically but also potentially through acquisitions, which will require a substantial portion of OpenTV's currently available cash resources. While this strategy is likely to depress OpenTV's financial performance over the next few years, such efforts and investments are required to insure OpenTV's long-term success. Without such investments, Kudelski believes that the long-term viability of OpenTV's business as a standalone entity is seriously in doubt." (Note: for an in-depth discussion of OpenTV's past and current acquisition strategy, as well as of its business strategy in general, see [itvt]'s September, 2008 interview with CEO, Ben Bennett, in Issue 8.01.)

Kudelski's response to OpenTV's rejection of its buyout offer also responds to an April 2nd amended 13D filing by OpenTV minority shareholder, the Discovery Group (owns 12.3 million shares in the company), which dismissed the offer as not only "egregiously inadequate," but "predatory." According to Kudelski, Discovery's analysis is "fundamentally flawed and contains numerous inaccurate assumptions and misleading analysis, including:

  • Portraying the proposed transaction as a change of control;
  • Disregarding the significant risks that OpenTV faces;
  • Using unrealistic forecasts and assumptions as the foundation for its analysis;
  • Using historical valuation metrics and inappropriate comparables as a basis for measuring the fair value of OpenTV while ignoring business fundamentals;
  • Failing to acknowledge Kudelski's continued contribution to OpenTV's turnaround and the economic impact of a potential redirection of Kudelski's efforts; and
  • Ignoring open-market transactions. Examples of such evidences include," Kudelski's response continues, "OpenTV's share price at $1.00 at market close prior to Kudelski's announcement, and the arm's length average $1.09 price per share paid by Kudelski for the acquisition of more than 7.9 million publicly listed OpenTV shares between September 2007 and February 2008."

While the last paragraph of Kudelski's response states that it "has concluded that continued discussions will not be fruitful and has therefore decided to withdraw its proposal and terminate discussions with the Special Committee," the penultimate paragraph makes clear that the issue is far from closed: "Kudelski has received favorable responses on the benefits of the proposed combination from several key customers and major shareholders," the paragraph reads. "Customers have clearly stated to Kudelski that they strongly support the proposed combination, believing that a full integration of OpenTV and Nagravision [Kudelski's conditional access technology arm] provides the best platform for the long-term support of and investment in OpenTV's product portfolio. Kudelski reiterates its commitment to remain OpenTV's controlling shareholder and to protect its investment by undertaking all necessary measures to ensure its long-term success."

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