Description

ACTV INC. (IATV)

ACTV has signed a letter of agreement with Liberty Media for its acquisition at $2 per share. ACTV provides proprietary technologies, tools and technical creative services for interactive TV advertising, personalized programming applications and enhanced media. Liberty owns approximately 16% of ACTV and announced this deal in conjunction with two other deals. The first is the formation of Liberty Broadband International Television (LBIT) , a 90% owned subsidiary which will focus on investing in developing interactive television services and products for programmers and multi-channel video providers. Secondly, Liberty entered into a stock purchase agreement to acquire a controlling interest in Open TV Corp. (OPTV), a set-top box middleman provider that allows the creation of interactive and web browsing tools over television set-top boxes. Open TV powers 4 million boxes in the US and 24 million worldwide.

Liberty is controlled by John Malone who is in the news practically every day. He takes very little salary ($2,600) from Liberty which has a market cap of about $31 billion. I believe in his history his main objective was increasing stockholders value over the long term. If the deal goes through, Liberty pays $75 million for the remaining 37.5M shares it doesn’t already own. This is obviously chump change for Malone and Liberty. If all these deals go through for cash, it would be about $.10 dilution on Liberty’s NAV, in my opinion insignificant. A stock deal would be about $.16 per share dilution. Obviously the ACTV deal alone has virtually no dilution. Liberty is a huge conglomerate of media assets and is generally valued on the street on net asset value. Liberty announced the deal on May 8th. There is a 65 day negotiating period and payment will be in cash, Liberty shares or shares of a Liberty unit or affiliate. If the exclusive period ends without either party signing a definitive agreement, Liberty may elect, for a period of one day following the end of the exclusive period, to acquire the remaining shares of ACTV at $2 per share. Any deal between Liberty and ACTV requires board approval of Liberty Media and ACTV and also ACTV shareholders.

Basically Liberty and ACTV seem a perfect fit. ACTV creates interactive programming for both digital TV and for applications merging TV and the Internet. Liberty owns private companies such as 50% of Discovery Communications, producer of the Discovery Channel, the Learning Channel, Animal Planet and more; 42% of home shopping channel QVC; all of Starz Encore Group, which furnishes premium movie channels; as well as many foreign cable operations, including those in Britain, Chile and Japan. They also own stock worth $6 billion of News Corp., $5 billion of USA Networks, $3 billion of AOL, $2 billion of Sprint PCS, and $1 billion of United Globalcom and Motorola (the preceding are all estimates).

ACTV’s balance sheet, as of March 31, 2002, shows a $47M net worth and $71M in cash and short term investments. If $47M is the real net worth, then Liberty is acquiring complete control of this great technology company, which one has to assume they know inside and out, for about $30M.

When the deal was announced, ACTV was trading at $1.15. The next day and for many days after that the stock traded at $1.65-$1.75 – a normal discount for a micro cap arbitrage deal. The company subsequently lost a lawsuit they filed against Disney for patent infringement. ACTV stated they were “in strong disagreement with the court’s decision and may appeal” but there may have been an asset on the balance sheet (a lawsuit against Disney) that some people thought was worth something. The stock cratered immediately to $1.50 and has sold off slowly to around $1.30 where it presently trades.

This looks too small for any substantial player(s) to take advantage of this deal. If the deal doesn’t go through, it seems the stock would settle where it was before the deal was announced, around $1.15 or $.15 or so below its present price. If it does go through, you should have an approximately $.70 gain on a $1.30 stock – a great return. In my opinion we have 35 days until decision day and then another 45 days after that for approvals. Within 3 months I look for a 50% return.

Risks:
1. There is obviously a chance the deal doesn’t go through. But I just cannot see why Liberty and ACTV would announce this deal -- they know each other intimately and it’s a minute deal for Liberty – and not have everyone involved want to do the deal.
2. That we receive stock in Liberty or some unit or affiliate of Liberty. We may take a slight haircut from the $2 value if we receive stock instead of cash.

Catalyst

Takeover within 3 months.