TiVo $2.4 Billion Takeover Seen After Fight With Dish: Real M&A

TiVo $2.4 Billion Takeover Seen After Fight With Dish
A TiVo HD XL set-top box digital video recorder (DVR). Source: TiVo Inc. via Bloomberg

TiVo Inc., the unprofitable pioneer of digital-video recorders, is ripe for a takeover that may hand shareholders a 94 percent return after settling a seven-year patent battle with Dish Network Corp.

The $500 million settlement with Dish in May is enabling TiVo to profit from “time warp” technology that simultaneously records and plays back television shows. Even after losing money in 10 of the past 11 years and trading more expensively relative to revenue than 99 percent of consumer companies in the Russell 2000 Index, according to data compiled by Bloomberg, a sale of TiVo may fetch about $20 a share, or $2.41 billion, almost double its market value yesterday, Maxim Group LLC said.

While bearish bets against the stock climbed last month to the highest since Lehman Brothers Holdings Inc. collapsed in September 2008, Janney Montgomery Scott LLC says Alviso, California-based TiVo may be a takeover target for Google Inc., Microsoft Corp. or Rovi Corp. With the Dish lawsuit resolved, TiVo is more likely to boost sales with intellectual property fees from TV distributors AT&T Inc. and Verizon Communications Inc. and with expansion of its set-top boxes internationally, said Tony Wible, an analyst at Janney in Philadelphia.

TiVo “would be attractive to any company trying to become a more important part of the new video ecosystem,” said Chris Marangi, a portfolio manager at Rye, New York-based Gamco Investors Inc. “The Dish settlement validated their intellectual property. Any potential buyer of TiVo prior to the Dish settlement would have been rolling the dice.”

Gamco oversees $35 billion and about 790,000 TiVo shares.

Recording TV

Michael Boccio, a spokesman for TiVo, said the company doesn’t comment on rumors or speculation in the market.

The shares rose 54 cents, or 5.3 percent, to $10.83 today, the highest since April 20.

Katelin Todhunter-Gerberg, a spokeswoman for Google, declined to comment. Microsoft’s Mark Murray said the company doesn’t comment on rumors or speculation. Linda Quach, a spokeswoman for Rovi, said the company doesn’t comment on acquisition rumors.

TiVo, whose name has become the default verb to describe the act of digitally recording TV, was founded in 1997. Chief Executive Officer Tom Rogers is trying to remodel TiVo as a partner to cable and satellite-TV operators for hardware and software, instead of just selling set-top boxes to consumers for about $100, plus $20 a month for service.

The company’s customers, both direct and through TV distributors, dwindled to 1.96 million in April from 4.4 million in 2007, according to regulatory filings, as generic DVRs became widely available. TiVo subscribers can record, pause and replay shows in progress and access movies, shows and videos through services such as Netflix Inc. and Google’s YouTube.

Patent Lawsuit

TiVo first filed a patent-infringement lawsuit in 2004 against Dish and EchoStar Corp., both based in Englewood, Colorado, when they were a single satellite-TV and equipment company called EchoStar Communications Inc. The business split in 2008.

After seven years of legal disputes and appeals, the companies settled all patent litigation on May 2, awarding TiVo $500 million, including an initial payment of $300 million with the rest to be paid through 2017.

TiVo has also filed lawsuits claiming AT&T’s U-Verse and Verizon’s FiOS television and Web services infringe the patent on technology that allows viewers to record and play back video at the same time and two others for DVR technology. Microsoft, which supplies some functions to U-Verse, and Motorola Mobility Holdings Inc., which makes set-top boxes for Verizon, have filed their own challenges to the TiVo patents. Separately, Microsoft filed a patent complaint with the U.S. International Trade Commission in Washington, seeking to prevent TiVo from importing its set-top boxes into the U.S.

‘Opened the Door’

TiVo may now garner at least $300 million in combined payments from AT&T and Verizon based on the Dish settlement, said Mark Harding, an analyst at Maxim Group in New York.

“Now that the settlement is over and the probability of a settlement with AT&T and Verizon has increased, it’s even more of an attractive takeover candidate,” Harding said. “It has opened the door for a deal.”

TiVo reported its only annual profit -- $104 million -- in the year ended January 2009, the result of damages paid earlier by Dish and EchoStar.

The company may return to profitability and earn $20.9 million in net income this year, buoyed by the Dish settlement, according to the average of five analysts’ estimates compiled by Bloomberg.

Room to Rise

TiVo traded at 5.8 times sales as of yesterday, the second-most expensive consumer company in the Russell 2000. The average price-to-sales ratio is 1.1 times, Bloomberg data show.

Still, that ratio has room to rise in a takeover. If TiVo is able to sell itself for $20 a share, as Maxim’s Harding estimates, that would represent a 94 percent premium to yesterday’s $10.29 closing stock price and about 12 times sales in the last 12 months.

“The current price doesn’t fairly account for the revenue streams as well as the settlement and potential future licensing agreements,” Harding said. “There’s an attractive enough list of potential acquirers that increases the probability of TiVo eventually being acquired.”

Wible pegged a potential acquisition of TiVo at closer to $17 a share, or $2.05 billion, given the pending lawsuits with AT&T and Verizon. The company’s market value as of yesterday was $1.24 billion. TiVo had almost $180 million more in cash than debt as of April, data compiled by Bloomberg show.

Microsoft and Google

The most likely buyers include Microsoft and Google, said Janney’s Wible and Maxim’s Harding. Redmond, Washington-based Microsoft has wanted to offer a set-top box and have a presence in television systems through cable operators, Wible said. Given its involvement in a lawsuit with TiVo, it may prefer to buy the company than to risk losing and paying a fee, he added.

TiVo’s television search capability would appeal to Google, the world’s biggest Internet search engine, as it tries to gain a foothold in living rooms with Google TV, according to Wible. It would also complement the Mountain View, California-based company’s acquisition last month of SageTV, a DVR software maker to be integrated with Google TV, Harding said. Google TV lets users search online video and other content on their TV screens.

Rovi, the provider of on-screen guides for TV program listings and audience measurement services for advertisers, would also make sense as a buyer, according to Wible. TiVo measures DVR viewing habits with second-by-second data.

Living Room Media

“If you were to combine the two, you’d have a very powerful set of patents and technology -- all around living room digital media,” Wible said.

TiVo shares climbed 39 percent in the past year through yesterday, compared with a 36 percent gain for the Russell 2000 Index.

One drawback is that the company’s patents are aging and will eventually expire, said Kevin Landis, chief investment officer of FirstHand Funds in San Jose, California.

“If they were going to be a takeover candidate, why didn’t they get taken over before?” said Landis, who oversees $260 million including TiVo shares. “It’s easy to be a bear on TiVo because they’re not making any money and their cash cow is getting older and slowly dying.”

Short interest in the stock reached almost 13.7 million shares last month, the highest since September 2008, according to London-based research firm Data Explorers. Short selling is the practice of selling borrowed stock on the bet the price will decline.

‘Attractive Takeover Candidate’

TiVo has been striking more deals to supply set-top boxes or license its technology to cable and satellite-TV operators as it tries to tap into more of the 114.7 million U.S. TV households that Nielsen Co. estimates for next season. TiVo partnerships include Charter Communications Inc. and DirecTV in the U.S. and Virgin Media Inc. in the U.K.

“Between its patents, cable deals, technology and cash, TiVo should be considered an attractive takeover candidate,” Janney’s Wible said. “They’ve just beaten one of the savviest litigants in the world and so they’ve proven their ability to monetize this patent.”

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