If Rovi Doesn't Buy Tivo, Apple Or Amazon Could

Albert Fried & Company said though the potential merger of TiVo Inc. TIVO with Rovi Corporation ROVI has its "own merits," TiVo could be a better fit with consumer electronics companies such as Apple Inc. AAPL, Amazon.com, Inc. AMZN or Microsoft Corporation MSFT.

"As TIVO shares are now $9 and ROVI shares are $17, we think a deal could be easily justified by a Board of Directors in the $12 to $16 TIVO price range – a significant premium to the current price. However, should a deal not materialize we think TIVO could still be a target because the risk reward for on an Apple or Amazon decision to buy TIVO is favorable," analyst Rich Tullo wrote in a note to clients.

"From the perspective of intellectual property value we think a ROVI deal makes sense. However from the perspective of building challenger consumer products we think a ROVI deal is less attractive then an acquisition by a CE enterprise like Apple, Amazon, or Microsoft," Tullo continued.

"We think the CE firms can better market and develop TIVO and TIVO's ability to sell to roughly 80 million MVPD subs could be better exploited given the manufacturing and marketing synergies available in a CE merger."

However, the analyst said a ROVI merger has its own merits and a deal will likely strengthen both companies' respective legal claims against Samsung and Comcast Corporation CMCSA.

"While ROVI is modestly a larger firm, we view a potential merger more as a merger of equals than a takeover. TIVO has a higher organic revenue growth rate and strong balance sheet, and as a result we would expect a ROVI deal to be structured as an equity exchange as opposed to a cash acquisition. Combined TRovi would a $1 Billion revenue Company," Tullo added.

$400 Million In New Enterprise Value

The analyst noted that assuming a 10 TiVo to 8 ROVI share ratio the merger would create about $400 million in new enterprise value owing to strengthening ROVI's balance sheet, capturing about $125 million in operating synergies, and monetizing TIVO's roughly $200 million NOL (net operating losses).

Tullo noted that "TROVI" would be worth about $16.50 a share in combined equity. 

"We also suggest ROVI will immediately benefit from TIVO's recent acquisitions of Digital Smiths, and Cubiware whose cloud and services TV products are core to the ROVI franchise," he added.

Tullo has an Overweight rating and $14 price target on TiVo shares.

Late March, Jefferies said TiVo may be worth $11 to $15.50 apiece in a takeout scenario after New York Times said Rovi is in advanced negotiations to acquire TiVo.