TiVo Inc. (TIVO) increased the debt issuance in the form of Convertible Senior Notes from $120.0 million, as announced earlier, to $150.0 million with a semi-annual interest rate of 4.0% per year. The Senior Notes, expected to mature in 2016, will be available in a private placement to qualified institutional investors as per Rule 144A under the Securities Act of 1933.
For its initial buyers, TiVo has approved a 30-day option to purchase up to an additional $22.5 million, up from $18.0 million as announced earlier, of aggregate principal amount of notes to cover over allotment. The offering will close on March 10, 2011.
The issued notes will be convertible into the company’s common stock at the option of the buyers at an initial conversion rate of 89.6359 shares per $1,000 principal amount of notes. As per the initial conversion rate, the conversion price comes in at $11.16.
The stock closed at $8.75 per share when the bourses closed on March 8,2011 and it represented approximately 27.5% conversion premium to its conversion price.
TiVo is entangled in various legal battles against large companies such as Echostar Corp. (SATS), Dish Network Corp. (DISH), Microsoft Corp. (MSFT), AT&T (T), Verizon Communications Inc. (VZ) and most recently, Motorola Mobility Holdings Inc. (MMI).
TiVo is also fighting a lawsuit against Microsoft at the International Trade Commission (ITC), a quasi-judicial forum in Washington, D.C., where companies can ask for a ban on imports of competitors’ products if those products are found violating patent laws.
Funding of intellectual property litigations seems to one of the primary reasons for raising the cash.
In the fourth quarter of 2011, TiVo’s legal expenses were 46.0% of its total operating expenses. TiVo expects its legal expenses to double year over year going forward and for the forthcoming quarter, the company expects the expenses to increase $7.6 million sequentially.
TiVo’s growth also depends on its ability to launch new products on a regular basis, as the company faces stiff competition in the Digital Video Recorder (DVR) market from cable and satellite providers such as Comcast Corp. (CMCSA), DirecTV (DTV) and Dish Network Corp.
TiVo stated that a portion of the funds raised would also be utilized for its R&D activities as well as general corporate purposes. For fiscal 2012, TiVo anticipates that its expenses pertaining to research and development will increase in the range of $25.0 million to $30.0 million from $81.6 million spent in fiscal 2011.
We believe that the debt issuance might pose a significant headwind for the company going forward given its lackluster results and depleting cash reserves.
We have a Neutral recommendation on TiVo over the long term driven by new partnerships with leading companies, new customer wins, product launches and international expansion. However, increasing legal complexities, higher operating expenses, lower subscriber additions and additional debt remain primary headwinds for growth, in our view.
Currently, TiVo has a Zacks #4 Rank, which translates into a Sell rating in the short term.
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