NEW YORK (CNN/Money) -
Hughes Electronics and EchoStar Communications Corp. dropped their planned merger Tuesday due to opposition from federal regulators.
EchoStar must pay $600 million cash to Hughes, a unit of General Motors Corp., as a result of the termination of the proposed deal, the companies said. Hughes also retains its 81 percent ownership of PanAmSat (SPOT: Research, Estimates). EchoStar said it will take a $700 million fourth-quarter charge to cover the breakup fee and other merger-related expenses.
The proposed $19 billion deal would have combined the nation's two largest satellite television operators, Hughes' DirecTV and EchoStar's Dish Network. Officials of the two companies argued the combination was necessary to provide stronger competition for cable television operators in the face of consolidation in that industry.
But the Justice Department's antitrust division as well as 23 states, the District of Columbia and Puerto Rico moved to block the deal on competitive grounds, while the Federal Communications Commission also came out against the combination.
The companies offered to sell more assets to help create a viable satellite television rival, but that wasn't enough to satisfy regulators.
"We continue to believe that the proposed merger would have been a victory for consumers nationwide, and for our shareholders. We worked hard on it to get the required regulatory approval and are disappointed that we were not able to complete the merger," Hughes CEO Jack Shaw said. "However, since the merger couldn't be completed, we concluded that this settlement is the best alternative for Hughes and places us in the best position to move ahead with our business."
Shaw did not say what the next move would be for Hughes. EchoStar CEO Charles Ergen said his company will "seek alternative, innovative ways to provide competition to the rapidly consolidating cable industry."
GM had negotiated with Australian media conglomerate News Corp. (NWS: Research, Estimates) before reaching the deal with EchoStar. News Corp., which operates satellite television systems elsewhere in the world, had made an offer but withdrew it before GM entered into more detailed discussions with EchoStar.
News Corp. Chairman Rupert Murdoch has expressed continued interest in DirecTV, but GM had been precluded from having further discussions with other bidders until Tuesday's announcement. A News Corp. spokesman said the company had no additional comment on DirecTV Tuesday.
A GM spokesman said the company would now consider all options available to it for the unit. News Corp. does not have a U.S. satellite television operation, so there would be fewer anti-trust concerns for regulators from a sale to the Australian company. But EchoStar had outbid News Corp. previously, and with EchoStar unable to bid this time around, New Corp. would have less incentive to bid top dollar.
Hughes results have been improving, but it has not reported a profitable quarter since early 1999. In the third quarter it nearly broke even, losing 1 cent a share. Analysts surveyed by earnings tracker First Call expect the company to lose 4 cents a share in the fourth quarter, an improvement from the 12 cents a share loss in the year-ago period. Losses are expected to continue throughout 2003, but analysts expect a profit in 2004.
Still, GM is expected to go ahead with some kind of Hughes sale. The automaker has a large pension plan underfunding, creating the need for contributions. Hughes also has lost its major advocates within GM's top management. GM Chairman Jack Smith, one of its strongest supporters, is set to retire May 1. He already gave up his CEO position in February 2000. His brother, Mike Smith, had served as CEO of Hughes before he left in May 2001, just before the company began sales negotiations.
Shares of EchoStar (DISH: up $2.06 to $21.11, Research, Estimates) gained about 10 percent in midday trading following the announcement, and GM (GM: up $0.31 to $36.48, Research, Estimates) shares were slightly higher. But shares of Hughes (GMH: down $0.15 to $11.15, Research, Estimates) were slightly lower, as were shares of News Corp. (NWS: down $0.14 to $26.38, Research, Estimates)