June 12, 2013
On Friday, June 7 TIVO announced a settlement of protracted patent infringement litigation with Arris/Google (Motorola), Cisco and Time Warner Cable that will pay TIVO a lump sum of $490 million or about $3.50 per TIVO share. Market expectations (as well as our own) were clearly too high, as TIVO shares fell 17% on Friday to around $11. Shares had run up the previous day on rumors out of east Texas, the litigation venue, that a settlement had been reached. We were expecting a settlement or jury award much closer to $1 billion based on the number of alleged infringing set-top boxes and previous settlements with Dish, AT&T and Verizon.
While disappointing, the good news is that TIVO’s litigation expenses -- $11 million in the most recent quarter – should now disappear. The company also announced a doubling of its share repurchase plan to $200 million, a number that we find far too low for a company with balance sheet cash and cash commitments from earlier litigation settlements of close to $1.3 billion. We think a likely scenario with the stock price below $11 is that the entire authorization can be completed by September. We believe that if the stock price remains below $12, there is reason to expect a follow-on repurchase authorization, perhaps another $300 million that, if completed, would shrink the share count by about one-third by early 2014. From 137 million shares at April 30 (including 15 million of converts), $500 million of repurchases could bring the share count to below 100 million, a very meaningful return of capital in a relatively short period of time. This should put a floor under TIVO shares.
We have taken advantage of the recent TIVO share price dislocation – as hedge funds who were playing the litigation event have been actively selling -- by adding more shares to client accounts. Even assigning no value to TIVO’s legacy retail DVR business, its nascent audience measurement segment and considerable tax assets, TIVO’s current share price values the core MSO advanced television unit at only $200 million. We think that business is worth about $500 million today or about $14 per share, including balance sheet cash. If, as we expect, TIVO delivers smart capital allocation and executes on its MSO business over the next several months, the possibility of a sale of the company also becomes a reality in 2014. In that case, we could see $17 per share.
We’re well aware of the TIVO bear case: that it has little chance of customer traction with large domestic MSOs, that its largest customer (Virgin in the UK) is likely to flee at contract expiration due to the Liberty Global ownership transition, that TIVO’s key patents expire in 2018 and that the company has failed to deliver consecutive quarters of profitability throughout its history. We take the other side of the trade and say that a company with 90 percent of its market value in cash and a deal-savvy CEO can deliver 50% equity returns within 18 months from a combination of heavy share repurchases and, quite possibly, a sale of the company.
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