Cisco Systems said Thursday that it plans to acquire NDS Group, a top provider of content security and video software to pay-TV operators worldwide, in a deal valued at about $5 billion.
The NDS acquisition is a major redoubling of Cisco's efforts to serve cable, satellite and telco TV operators, amid rumors that it is seeking to sell off its set-top business unit. The deal, if completed, would be Cisco's biggest acquisition in the sector since its $6.9 billion takeover of Scientific Atlanta in 2006.
Cisco's stock was down 1.5% in midday trading Thursday, to $19.90 per share.
Under the terms of the deal, Cisco will pay $5 billion, including the assumption of debt and retention-based incentives, to acquire London-based NDS. The acquisition has been approved by the boards of directors of both companies.
NDS will give Cisco one of the most widely deployed condition-access systems for encrypting and authentication TV programming, as well as inroads with large operators, including DirecTV, Cox Communications and Cablevision Systems.
Cisco is positioning the NDS acquisition as extending the Videoscape platform strategy to let service providers and media companies deliver Web-enabled, multiplatform video services. In addition, NDS help Cisco expand into emerging markets, including China and India, where NDS has several established customers.
"Our strategy has always been driven by customer need and on capturing market transitions," Cisco chairman and CEO John Chambers said in announcing the deal. "Our acquisition of NDS fits squarely into this strategy, enabling content and service providers to deliver new video solutions that leverage the cloud and drive new monetization opportunities and service differentiation."
NDS completed a transaction to go private in early 2009. Private equity firm Permira Funds owns 51% of the company, and Rupert Murdoch's News Corp. holds a 49% stake.
The NDS product portfolio is "highly complementary" to Cisco's, NDS executive chairman Abe Peled said. He added that following the acquisition, Cisco will continue to pursue NDS's strategy of open software and services, working with a "wide range" of set-top box manufacturers.
NDS's 5,000 employees will become part of Cisco's Service Provider Video Technology Group, headed by senior vice president and general manager Jesper Andersen.
In an interview in December, Andersen -- a software engineer by background -- noted that TV delivery architectures are increasingly becoming software-centric, and "there's a lot of software control-plane architecture that we're building and acquiring."
At Cisco, Peled will be named senior vice president and chief strategist for Cisco's Video and Collaboration Group, of which SPVTG is a part. Peled will report directly to Cisco Video and Collaboration Group senior vice president Marthin De Beer.
The acquisition is expected to close during the second half of calendar year 2012, subject to customary closing conditions, including regulatory reviews in the U.S. and elsewhere.
NDS customers worldwide include Comcast, Cablevision, Cox, DirecTV, BSkyB, China Central Television, Kabel Deutschland, Sky Deutschland, Sky Italia and Liberty Global's UPC. According to NDS, its VideoGuard conditional-access system has been deployed in 114 million pay-TV households, while its middleware is in use on some 206 million devices.
Cisco said it expects the NDS acquisition to be accretive to earnings in the first full year on an adjusted basis. The company noted that a significant portion of NDS's revenue is recurring, with long-term contracts with a typical average duration of five years.
Regarding the $5 billion price tag, Cisco said that the NDS acquisition is "generally in line" with the earnings before interest, taxes, depreciation and amortization multiples paid when NDS was taken private in 2009 and is within the multiples ranges for comparable deals, including Cisco's $3.3 billion acquisition of videoconferencing equipment vendor Tandberg in 2010.
NDS, founded in 1988 by a group of Israeli computer scientists, has development centers in France, India, Israel, Korea, the U.K. and the United States.
In July 2011, NDS hired Dave Habiger, formerly CEO of Sonic Solutions, to replace Peled, who after 16 years leading the company assumed the role of executive chairman.