October 26, 2009
Dear Fellow OpenTV Shareholders,
Arcadia Capital Advisors, LLC, through its affiliated funds (Arcadia” or we”), is the beneficial owner of Class A ordinary shares of OpenTV Corp. (OpenTV”, or the Company”). Upon extensive due diligence, conversations with management, and an in-depth analysis, Arcadia urges you to reject the $1.55 per share Tender Offer (Tender Offer” or Second Offer”) by Kudelski, S.A. (Kudelski”) for OpenTV’s Class A ordinary shares announced on October 5, 2009.
We believe the Tender Offer fails to properly reflect the value of the OpenTV asset and shareholders should demand a higher price for the following reasons:
1. Intrinsic value of OpenTV shares is substantially higher,
2. Kudelski offer doesn’t account for synergies and foreign exchange benefits,
3. Kudelski has an overly negative view of OpenTV’s business,
4. Timing of the Tender Offer is unusual and leads to information asymmetry,
5. Kudelski faces a significant hurdle in a minority squeeze out and delisting strategy,
6. Tender Offer financing provides insights into Kudelski’s ultimate plans.
OPEN LETTER TO OPEN TV STOCKHOLDERS
PAGE 2
While we believe an acquisition of OpenTV by Kudelski would be beneficial to all parties involved, any transaction must fully reflect the underlying value of OpenTV's business. In our opinion, shareholders have a lot to gain by rejecting the current offer.
1) Intrinsic Value of OpenTV Shares is Substantially Higher
The current offer significantly undervalues the fair value of OpenTV Class A shares. A $1.55 per share offer values the Company at a multiple of enterprise value (EV”) to last twelve months (LTM”) EBITDA 1 of 7.5x. A much higher purchase price multiple of LTM EBITDA would be more appropriate.
We believe a substantially higher price is appropriate based on the following observations:
• The Special Committee of OpenTV’s Independent Board Members (the Special Committee”) indicated that the acquisition price should be at or above $2.00 per share,”
• NDS Group, a close comparable to OpenTV, was acquired by Permira Advisors, at a 13x EV/LTM EBITDA multiple,
• Kudelski’s own stock is currently trading at a similar 13x EV/LTM EBITDA multiple, and
• Kudelski’s offer price premium analysis is not relevant given the significant improvement in equity market conditions since February 26, 2009.
(1) EBITDA represents earnings before interest, taxes, depreciation and amortization and is a proxy for Non-GAAP cash operating earnings.
After spending three months fully assessing Kudelski’s $1.35 per share offer from February 26, 2009 (the First Offer”), the Special Committee, led by Eric J. Tveter, with the help of its independent financial advisor, UBS, concluded on April 16, 2009 that Kudelski’s offer implied a valuation that was well below the corresponding EBITDA multiples for selected publicly traded technology companies and selected technology companies which had been involved in business combination transactions.” On May 6, 2009 Mr. Tveter stated to Kudelski that an appropriate price should be at or above $2.00.” Kudelski rejected this view and withdrew their First Offer on June 4, 2009. We can only wonder if Mr. Tveter’s views of intrinsic value led to his ultimate departure from the Kudelski controlled board on October 7, 2009.
Permira Advisors Ltd., a European private equity firm, purchased a 51% stake in NDS Group (NDS”) on February 5, 2009 as part of a take private transaction valued at 13x LTM EBITDA. In addition to being OpenTV’s and Kudelski’s primary competitor, NDS had a similar Class A and Class B share structure. It is our belief that, as part of this transaction, NDS’ Board, shareholders and financial advisors ensured that the minority shareholders received fair value in the going private transaction.
Kudelski’s own stock currently trades on the Swiss Exchange at a price which implies a valuation of 13x EV/LTM EBITDA. As OpenTV is a subsidiary of Kudelski, the two companies have overlapping customers and comparative operating characteristics. Based on these similarities, we believe that any offer for OpenTV should properly reflect Kudelski’s publicly traded valuation. We think that OpenTV’s minority shareholders should not allow Kudelski to arbitrage their stock, buying OpenTV at an enormous discount to what it would be valued once it is fully owned by Kudelski. Furthermore, Kudelski paid $3.60/share in 2007 to acquire a controlling position from Liberty Media based on the strategic nature of the OpenTV asset. Why should shareholders allow Kudelski to complete the acquisition at less than half the price paid a little over two years ago?
In the Second Offer, Kudelski cited the offer price premiums relative to the $1.00/share closing price of OpenTV’s stock as of February 26, 2009 as the sole valuation rationale for shareholders to accept their offer. In our opinion, the price of OpenTV’s stock at the depths of the global equity markets is not relevant. At that time, OpenTV was holding $0.74/share in cash on its balance sheet which has now grown to $0.81/share. By way of comparison, the NASDAQ index is up 55% since February 26, 2009 while Kudelski’s own stock is up 120% during that same period.
OPEN LETTER TO OPEN TV STOCKHOLDERS
PAGE 3
2) Kudelski’s Offer Doesn’t Account for Synergies and Foreign Exchange Benefits
We believe that the purchase of OpenTV would drive tremendous economic value and fill product gaps for Kudelski while the return on investment would remain attractive even at significantly higher prices. Based on our analysis of Kudelski’s financial performance, we believe that Kudelski’s earnings remain temporarily depressed from a recent change in its business model. Currently, because of accounting methodologies, Kudelski can only recognize 33% of OpenTV’s earnings while it recognizes 100% of revenues. By acquiring the remaining 67% of stock Kudelski could recognize 100% of OpenTV’s earnings, providing a boost to its own temporarily depressed earnings.
Furthermore, Kudelski should also be able to realize incremental EBITDA contribution generated by synergies from overlapping research and development costs, redundant sales and marketing expenses, and elimination of public company costs and duplicative overhead. To be clear, we believe these synergies would be recognized by reduced spending in both organizations. However, these spending reductions can only occur once OpenTV is a 100% owned subsidiary of Kudelski.
Based on conservative estimates, we believe that Kudelski would be able to recognize $25M of incremental EBITDA as follows:
• An additional $10M of LTM EBITDA in its own financial statements by owning 100% economic interest of OpenTV, and
• At least $15M in incremental EBITDA contribution from immediate cost synergies.
Our analysis indicates there are also additional longer-term revenue and cost saving opportunities that are harder to quantify, which we have excluded from this analysis. When evaluating this incremental EBITDA contribution against Kudelski’s cost of acquisition, the value proposition is clearly apparent. Based on our analysis, the investment should pay for itself in 1.4 years at the $1.55/share offer price (see Exhibit 1). Given this short t