NDS Group plc NNDS
December 20, 2008 - 3:31pm EST by
cross310
2008 2009
Price: 48.36 EPS
Shares Out. (in M): 0 P/E
Market Cap (in $M): 806 P/FCF
Net Debt (in $M): 0 EBIT 0 0
TEV (in $M): 0 TEV/EBIT

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Description

***Warning – if you don’t like playing merger arb scenarios…please do not read any further (or vote). I will make this short and sweet.


The Deal: What Happened?
·          News Corp (NWS) and private equity firm Permira Advisors LLP proposed acquiring the public equity of NDS Group @ $63/sh (after bumping this from $60/sh a few months ago)
·          Final proxy is definitive for the $3.7B all-cash buyout/ownership restructuring by NWS/Permira

Deal Rationale:
·          NNDS is very overcapitalized, but can’t pay out a dividend without triggering a significant tax bill from repatriating foreign income to NWS
·          The deal is structured to by highly tax-efficient for NWS – effectively saving them over $1.5B that can be used for acquisitions, buybacks, etc.
·          Secular Trends: i) incr digital penetration (<10% globally); ii) incr NNDS svcs <30% digital households; iii) NNDS sells more boxes/house & more svcs/box
·          Secular growth of digital set-top boxes (STB) with NDS gaining share for conditional access (CA) and middleware; DTV + BSkyB + Sky Italia = ~62% revenues

Next Datapoints
·          1/06/09: European Commission vote for approval
·          1/13/09: Shareholder vote
·          Mid-Jan: UK High Court hearing; NWS IRS Tax Ruling
·          2/05/09: Anticipated deal closing
·          2/25/09: Long Stop Date – either Permira, NWS or NNDS can walk if the deal is not effective by this date; debt financing is available thru month end

Thesis
·          I believe there is very high likelihood of successful deal at $63/sh cash by early February – based on proprietary checks, analysis & discussions w/ top shareholders and management.
·          Assuming a $49/sh current share price and a Feb. 5th closing date – represents ~22% simple and ~169% annualized return to deal closing

Description
NDS Group plc (NNDS) supplies open conditional access software and interactive systems for the secure delivery of entertainment and information to television set-top boxes, and PCs. NNDS also develops secure datacasting solutions for the distribution of data and multimedia.

Customers
·          DIRECTV
·          BSkyB
·          SKY Italia
·          DIRECTV PanAmericana
·          Sky Mexico
·          Sky Brasil
·          FOXTEL
·          SkyLife
·          TataSky
·          YES
·          Cablevision
·          Shenzhen Media Group
·          Viasat.

Shareholder Approval
·          The deal requires both a majority of the Series A shareholders, as well as 75% of the votes cast.
·          The top 10 shareholders owns ~57% of the Series A shares (as of 9/30/08), while the top 3 holders owned ~28% – enough to block the deal

***This is not a TTWO, YHOO or CVC situation. I spoke to several of the top NNDS shareholders – all will happily vote in favor of the NWS/Permira deal.

Closing Requirements
·          Debt: JPM/MS have committed to underwrite 50% each, although they are syndicating ~1/3 of the deal
·          Equity: Permira signed binding commitments to provide equity, if debt in place AND deal approved by holders/courts by 2/25/09 ‘Stop’ date
·          IRS Letter: NWS needs IRS ruling that deal is non-taxable to NWS
·          NNDS needs court approval – post final proxy & IRS ruling
·          NNDS must have $724.9mm at the deal closing. As of 10/30, NNHDS had $711.2mm – slightly than needed; should not be an issue giving recent cost-cutting and capex cuts

Risks
1) Permira walks away: The biggest risk here is Permira not anting to fund the ~$915mm equity commitment. Two things mitigate this risk:
      ·          MAC Clause: UK takeover law has a very onerous material adverse change clause. Basically, the only way Permira (or NNDS) can walk away is if the deal doesn’t close by 2/25/09.
      ·          NWS as buyer and seller: NWS needs to do this deal in order to save ~$1.5B in taxes/
2) Liquidity: NNDS has a ~16mm share float, and trades ~100k ADS/day – not very liquid (although you can get blocks periodically). Besides from the deal risk, I believe the liquidity and deal complexity are the main reasons for the wide spread.

Conclusion
·          The wide deal spread clearly indicates there is potential for the deal to break, despite what I outlined above
·          Downside PT: $36/sh, or 12x $2 EPS power + ~$12/sh cash
 
Price Target = $63/sh cash by Feb ’09; YE08: $14/sh cash

Catalyst

1/06/09: European Commission vote for approval; 1/13/09: Shareholder vote; Mid-Jan: UK High Court hearing; NWS IRS Tax Ruling; 2/05/09: Anticipated deal closing
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