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EchoStar wins DirecTV
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October 29, 2001: 5:23 p.m. ET
Merger of top U.S. satellite providers will face tough regulatory challenge.
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NEW YORK (CNNmoney) - Hughes Electronics and EchoStar Communications started on what could be a long road toward combining the two biggest U.S. satellite providers Monday, with consumer groups already voicing dissent.
Analysts said EchoStar's purchase of General Motor's Hughes - owner of the top direct broadcast satellite operation DirecTV - for $26 billion in cash and stock will face stiff regulatory review which will necessitate some kind of concession.
And, if the deal falls through, many insiders see media titan Rupert Murdoch, who withdrew News Corp.'s bid for Hughes Saturday, ready to pick up the pieces.
"This is a fantastic deal for the satellite industry and both companies," David Kestenbaum, analyst with ABN Amro, told CNNfn. "But I think that ultimately there will be some type of compromises that will have to be made to get this deal through."
"There's still a decent chance to get the deal through," Kestenbaum said. "I'd peg it at 50-50."
An EchoStar-Hughes combination would create a dominant satellite company with 16.7 million subscribers. EchoStar CEO Charlie Ergen has long argued that a combination of EchoStar and DirecTV, which would combine the No. 1 and No. 2 cable satellite providers, is not anticompetitive since cable TV is also a viable competitor in the market.
Ergen told CNNfn that the combined EchoStar-Hughes still will have fewer subscribers than AT&T Broadband, which is the nation's largest cable provider with 16 million subscribers. [343 KB AIFF] or [343 KB WAV]
But consumer groups are already expressing concern about the deal.
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EchoStar CEO Charles Ergen and GM CFO John Devine chat with CNNfn's Deborah Marchini about the agreement.
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"This is bad news for consumers and competitors," said Jeff Chester, executive director of Washington-based Center for Digital Democracy (CDD), a consumer advocacy group active in media and telecommunications issues. "We are losing competition and some diversity."
"Now they (consumers and competitors) will have to go through a celestial gatekeeper who will decide what the prices and terms will be for both programmers and content providers."
Last week, the president of the National Consumers League asked the Federal Trade Commission and the U.S. Justice Department to look into the possible implications of an EchoStar takeover of DirecTV.
"This would almost certainly lead to reduced competition, higher prices and poorer service for millions of consumers," wrote league president Linda Golodner.
Littleton, Colo.-based EchoStar will be looking to lawyer David Boies, who currently is representing the company in its antitrust suit against DirecTV filed in February 2000, for help battling regulatory challenges. Boies, who also represented the government in the antitrust case against Microsoft, will try to persuade regulators that the EchoStar-Hughes merger is not anticompetitive.
Boies attended Monday's press conference announcing the transaction. The combination of EchoStar and DirecTV would have only 17 percent market share compared with the dominance of cable companies, which reach almost the rest of the market, Boies said.
"Concentration [of direct broadcast satellite companies] is necessary to compete against cable monopolies," he said.
Kestenbaum said EchoStar will likely argue cable is the top competitor in urban and suburban areas, but will have to make some type of deal which would permit controlled pricing in rural areas where satellite is the main television provider.
Antitrust reviews could lead to long delays before the deal is consummated. The transaction, which is subject to Federal Communications Commission review, is expected to close in the second half of 2002.
Murdoch not out of the picture
Battling on the other side will be Rupert Murdoch, who had hoped to add a U.S. presence to his satellite empire.
As of last Friday, News Corp. was considered the favorite to win Hughes but the tide apparently turned on the premium EchoStar's $26 billion offered. EchoStar's proposal values Hughes shares at $18.44, a 20.1 percent premium over Friday's close of $15.35. Hughes will own 53 percent of the combined firm, EchoStar will have 36 percent and GM will have 11 percent.
Murdoch is expected to rally his forces in Congress to oppose the deal.
Going into the weekend, News Corp. thought it was just a matter of "signing the contract," a source said, but GM's board asked for 48 hours more so that EchoStar could make last minute adjustments to its proposal.
If EchoStar's bid fails, Murdoch likely will return with another offer for Hughes that probably will be lower than the present one, sources said.
"There were only two bidders before and one will be disqualified because of regulatory problems. Clearly he will be in a better position," a source said.
News of EchoStar's win caused News Corp. (NWS: down $1.80 to $27.25, Research, Estimates) shares to dive more than 6 percent at the close Monday while General Motors (GM: down $2.64 to $42.76, Research, Estimates) dropped more than 5 percent and Hughes (GMH: down $0.99 to $14.36, Research, Estimates) also shed more than 6 percent. EchoStar (DISH: down $1.18 to $24.08, Research, Estimates) fell more than 4 percent.
EchoStar's winning offer
GM President Rick Wagoner said the deal would deliver maximum value for GM shareholders and provide "continued strong growth" at Hughes.
EchoStar's Ergen termed it "an extremely compelling combination." The deal is expected to give EchoStar an opportunity to derive cost savings and additional revenue of $56 billion.
If EchoStar loses the regulatory battle to win Hughes or walks away, it still will pay GM $5 billion for PanAmSat, a satellite services provider, and a $500 million breakup fee, sources said.
"This is a win-win for GM," a source said.
The combined group, which will have nine board members, three of them from EchoStar, will be headed by Ergen as chief executive and will use the DirecTV name.
After the transaction, existing EchoStar shareholders will receive 1.3699 shares of the new EchoStar for each share held before the merger. 
-- from staff and wire reports
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