Digital TV M&A Heats Up
Today, Alcatel SA (NYSE: ALA; Paris: CGEP:PA) announced plans to purchase iMagicTV (Nasdaq: IMTV and TSX: IMT), a maker of software for use in digital television applications, in a stock transaction worth about $30 million.
This past Monday, Motorola Inc. (NYSE: MOT) filed documents with the SEC related to an ongoing dispute with Next Level Communications (Nasdaq: NXTV), which makes video DSL gear for carriers. Board members of the smaller company are going to court to fend off Motorola's unsolicited tender offer, announced last month, to minority shareholders in a proposed transaction worth roughly $30 million.
Why should we care? In both instances, large companies with significant stakes in the broadband services market are looking to get their hands on IP TV technology of their very own as quickly as possible.
Analysts have maintained the IP TV market is slow on the uptake (see We Want Our Packet TV! and Digital TV: Who'll Tune In?). But broadband is advancing, and new legislation could improve the regional Bells' competitive position (see The Other Powell Preps for FCC Vote) and help stimulate those carriers' desire to deploy "triple play" voice/data/video services, initially over DSL, as weapons to fight encroaching cable MSOs (multiservice operators).
Rosier market projections seem to lie beneath both Alcatel's and Motorola's rush to buy IP TV companies now -- ones they already own in part. (Alcatel owns about 16 percent of iMagicTV, and Motorola is Next Level's majority stakeholder, with 74 percent ownership of the company's common stock). Alcatel and Motorola seem to see sufficient momentum in the IP TV market to try and stake a permanent claim to it.
But these aren't necessarily done deals. In Motorola's case, things have gotten nasty. The company has approached the minority stakeholders of Next Level, despite objections from board members who aren't associated with Motorola. Those board members have filed suit against the would-be acquirer, claiming that Motorola made the tender offer at this particular time based on proprietary knowledge, acquired under nondisclosure agreements, that upcoming customer wins might increase the value of Next Level's stock, forcing it to pay more for outstanding shares.
Next Level spokespeople say that the tender offer is far below what independent board members believe is a reasonable price for the company, considering its market outlook. They'd consider a buyout at a higher price from Motorola or another firm, they say.
Motorola's public statements and filings say Next Level's objections are without merit. The company didn't return a call asking whether Motorola would consider raising the offer it now has to purchase outstanding shares at $1.04 per share.
Next Level's prospects do seem better than they've been for awhile. During Next Level's February 4 earnings call, CEO J. Michael Norris stated, "We believe we are turning the corner in the development of our business." He cited good relations with Canada's Manitoba Telecom (see Next Level Supplies Manitoba TV), as well as growing relationships with Bell Canada (NYSE/Toronto: BCE) and Qwest Communications International Inc. (NYSE: Q), which contributed about $1.5 million to Next Level's revenues last quarter. He also boasted of numerous contracts with small independent carriers (see Next Level Turns Triple Play and Next Level Wins at Telcos). Norris said that despite ongoing challenges, he anticipates a "vastly improved 2003," starting with a prediction that first-quarter revenues will exceed last quarter's $14.2 million by 30 to 40 percent.
IMagicTV's situation seems more lackluster. In its quarterly results announced January 15, the company reported a net loss of $4.6 million on revenues of $334,000. Still, execs boasted of a contract win with Telus Corp. (NYSE: TU; Toronto: T) and said the company was looking at alternatives.
The Alcatel buyout seems to be a good fit. For its part, Alcatel says it anticipates ongoing growth in broadband services, accompanied by a sizeable increase in home entertainment offerings that include video -- in direct competition with cable TV companies. A company spokesman cites analyst reports that say about 6 percent of all broadband-equipped homes worldwide will include telco TV links within two years.
It remains to be seen whether these predictions pan out. Further, bringing these companies, however small, under the corporate umbrella is always a challenge, and more so than ever in these trying times.
There's also the chance that the Motorola/Next Level deal won't fly. The tender offer closes February 25; until the day after that, says a Next Level spokesman, the company's future is up in the air.
— Mary Jander, Senior Editor, Light Reading