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Billionaire Ken Griffin Joins Steve Cohen In TiVo

Marshall is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

It appears a couple big-name billionaires could be betting on a loosening of the credit markets and a rebound in the buyout markets. Per a 13G filing last week, billionaire Ken Griffin, founder of Citadel Investment Group, announced a 5.2% stake, 6.6 million shares, in TiVo (NASDAQ: TIVO). Griffin joins SAC Capital and Steve Cohen as two of TiVo's biggest hedge fund backers. SAC owned 5.5 million shares at the end of the third quarter. (check out all the hedge funds that own TiVo). 

The potential value in owning TiVo shares is a speculated buyout. We at Insider Monkey believe a buyout would provide a solid premium to the current share price and although speculation first started back in 2005, 2013 could be the year. TiVo’s patented technology has proved to be a very useful tool for generating cash. Its most recent big win, which has allowed the company to collect a sizable settlement and could be a fundamental driver of a potential takeover, was a patent lawsuit settlement with Dish Network that provides TiVo with $500 million, paid out from 2012 to 2017. TiVo also has pending patent claims against Motorola, Cisco and Time Warner. Steve Cohen was boosting his stake during the third quarter, adding 129% to his second quarter position (read more about Cohen’s TiVo purchase).

The deal has a number of potential suitors. There is no doubt that Apple (NASDAQ: AAPL) needs to embark on an Apple iTV sooner rather than later. Estimates put the potential synergies between Apple and TiVo to be as high as $50 million. The fact that Apple has yet to introduce its iTV has left the market wide open for other major tech companies, including Google (NASDAQ: GOOG), Microsoft (NASDAQ: MSFT) and Amazon.com (NASDAQ: AMZN)Apple has been rumored as one of the most interested tech companies, but there has been speculation on whether Amazon might be getting into the TV market. Back in mid-2011, speculation first began about Microsoft or Google having potential interest in the company. One of the key selling points for Microsoft, according to investment firm Albert Fried & Co., is that Microsoft could add the technology to its Xbox 360 console and the TiVo platform would give Microsoft more merchandise to sell in its stores. A possible takeover by search giant Google is also a possibility, although Google has made a recent move to divest away from the TV industry. Cisco has also been rumored to be considering a takeover of TiVo, but there are concerns over whether this is still possibility after its purchase of NDS. 

The potential Dell buyout suggests that the financial markets could finally be loosening. There have been many deals in the market with no buyers around to take advantage due to financing concerns. The one bright spot for a potential TiVo buyout is that many of the potential buyers could purchase TiVo with just cash on their balance sheet:

<table> <tbody> <tr> <td> <p><strong><em>($ in billions)</em></strong></p> </td> <td> <p><strong>Google</strong></p> </td> <td> <p><strong>Microsoft</strong></p> </td> <td> <p><strong>Apple</strong></p> </td> <td> <p><strong>Amazon</strong></p> </td> </tr> <tr> <td> <p><strong>Cash & Short-term Investments</strong></p> </td> <td> <p>$45</p> </td> <td> <p>$66</p> </td> <td> <p>$29</p> </td> <td> <p>$5</p> </td> </tr> </tbody> </table>

TiVo has a $1.5 billion market cap and enterprise value that is just over $1 billion. 2013 should prove to be exciting for the DVR company. The recent string of settlements with Dish Network, AT&T and Microsoft has given the company an interim recurring revenue stream. Big-time recent settlements include the one with Dish and AT&T, which is $215 paid out through 2018. TiVo's other recent success in patent litigation includes Verizon agreeing to pay TiVo $250 million, with quarterly payments through 2018 and a $100 million initial payment. 

TiVo is still seeing pressure in its operations segments, with EBITDA and net income fluctuating over the years, but predominantly staying in negative territory. 

<table> <tbody> <tr> <td> <p><strong><em>($ in millions)</em></strong></p> </td> <td> <p><strong>TTM</strong></p> </td> <td> <p><strong>2011</strong></p> </td> <td> <p><strong>2010</strong></p> </td> <td> <p><strong>2009</strong></p> </td> <td> <p><strong>2008</strong></p> </td> <td> <p><strong>2007</strong></p> </td> </tr> <tr> <td> <p><strong>EBITDA</strong></p> </td> <td> <p>-$94</p> </td> <td> <p>-$122</p> </td> <td> <p>-$77</p> </td> <td> <p>$-15</p> </td> <td> <p>$9</p> </td> <td> <p>-$15</p> </td> </tr> <tr> <td> <p><strong>Net Income</strong></p> </td> <td> <p>$17</p> </td> <td> <p>$102</p> </td> <td> <p>-$85</p> </td> <td> <p>-$24</p> </td> <td> <p>$104</p> </td> <td> <p>-$31</p> </td> </tr> </tbody> </table>

TiVo has had issues fundamentally and operationally in the past. However, revenue is expected to be up 8% in fiscal year 2014, due to a ramp up of TV distribution channels. These benefits should come from an overall rise in subscribers, with TiVo adding an expected 1 million in fiscal year 2014 and 930,000 in fiscal year 2013. For the future, irrespective of a buyout, the growing DVR market should lift the company. TiVo has been looking to strengthen its operations with the acquisition of TRA in 2012. TRA is a database platform that links info on same-household TV viewing and purchase transactions. The recurring revenue model includes distribution deals with cable operations, such as Comcast and Charter. The growing DVR market and new partnerships are expected to grow long-term earnings, according to Wall Street estimates, at 35% annually. The balance sheet also appear fairly strong, with $600 million in cash, which is nearly $4.50 per share - versus the current stock price of around $12.  

Although much of the investor interest for TiVo might be driven by buyout speculation, the DVR company does have opportunities to generate substantial cash flow over the interim via operational initiatives. In addition to Ken Griffin and Steve Cohen, billionaire Leon Cooperman of Omega Advisors added TiVo to his portfolio during the third quarter (check out Copperman's upside picks).

mhargra has no position in any stocks mentioned. The Motley Fool recommends Amazon.com, Apple, and Google. The Motley Fool owns shares of Amazon.com, Apple, Google, and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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