EchoStar, Hughes bracing for reg review
EchoStar and Hughes Electronics made history Monday, creating a satellite behemoth they claim will transform the pay TV market and give cable operators their first taste of real competition — if regulators will let them.
Investors liked the price offered (a 20% premium above Hughes’ Friday close) but were dubious on the antitrust issue, bidding shares of EchoStar, Hughes and Hughes parent GM lower in a down market on fears the deal won’t close.
EchoStar CEO Charlie Ergen and DirecTV chairman-CEO Eddy Hartenstein plan to travel to Washington today to meet with top regulators and lawmakers, including Rep. Billy Tauzin (R-La.), chairman of the powerful House Commerce Committee, one of the panels with jurisdiction over the transaction.
The announcement was also notably embarrassing to Rupert Murdoch’s News Corp., which had been negotiating with Hughes for nearly 18 months. Murdoch was bested by deceptively folksy EchoStar chair Ergen, who described himself during a packed press conference as “someone from Tennessee who’s involved in a hobby that’s a lot of fun.” He will run the new entity, with 16.7 million subscribers.
Stressing the facts
Ergen, alongside execs from Hughes and GM, urged surprised Wall Streeters and press to focus on the result, not the titillating process, of the bidding that came to a head this weekend when News Corp. walked off in a huff.
“We had two world-class companies with very different strengths and advantages,” Hughes CEO Jack Shaw said. “We believe we found the perfect partner and absolutely the best deal.”
GM and Hughes, which owns DirecTV, had snubbed EchoStar’s early advances, forcing Ergen into an unsolicited public offer in August.
“Maybe we didn’t think there was a good enough case (then), but over the past six to nine months there have been a number of changes in the industry,” Shaw said.
He cited the success of digital cable, the prospect of more cable mergers, a deregulatory air in D.C. and a dawning certainty on the part of both satcasters that they couldn’t afford to roll out broadband services on their own.
News Corp. offered cash up front, which the GM board liked, but the latter was apparently torn over the stock portion of the deal, which would have given shareholders a stake in a new and untested News Corp. subsid, Sky Global Networks.
Still, a deal with News Corp. was all but wrapped up when Ergen made a last aggressive stand and won over Hughes management, which, in turn, persuaded GM to switch camps.
EchoStar only had partial bank financing of $2.75 billion in place. In an unusual move, GM offered a bridge loan for the additional $2.75 billion it required backed by a personal guarantee from Ergen, who agreed to put a chunk of his EchoStar stock in escrow until he finds another bank to commit the rest of the cash.
The new partners don’t expect Murdoch to be a graceful loser.
“There are people who would like to be in our position today, who aren’t in our position, who are going to stir things up” in Washington, said Ergen. But he’s confident regulators will consider the entire pay TV market, which is 80% cable, when weighing the deal.
He also promised to work with Washington on a major source of concern — rural subscribers with no access to cable who would have one choice of pay TV provider if EchoStar and DirecTV were to merge.
News Corp. likely won’t be alone in raising questions. The proposed merger prompted a flurry of statements in the nation’s capital.
“Obviously, our big concern is the impact of having just one satellite company providing multichannel programming,” said Tauzin aide Ken Johnson. “The question we have to answer is how do you define competition in today’s evolving marketplace. Is it satellite vs. satellite or satellite vs. cable? In the end, will this deal leave consumers with fewer choices or better choices?”
Sen. Ernest Hollings (D-S.C.), chair of the Senate Commerce Committee, insisted, “That kind of consolidation would leave consumers with few, if any, choices.”
But Sen. Herb Kohl (D-Wis.) and Sen. Mike DeWine (R-Ohio), top solons on the Senate Antitrust Subcommittee, said in a joint statement that antitrust concerns, while serious, are not necessarily fatal to the deal.
National Assn. of Broadcasters prexy-CEO Eddie Fritts griped that the deal would create the world’s largest monopoly video delivery system and called on Congress and federal regulators to extract stern concessions, like carriage of all local TV stations.
Cable operators were surprisingly quiet. A spokesman for the National Cable Telecommunications Assn. said the lobbying group has no plans to appeal to regulators. “It’s dangerous to try to use the government to beef up your side because it could backfire.”
Cable is too far ahead of satellite to worry, said one cable exec. And the last thing the business needs, noted another, is to draw attention to cable rates and service issues.
Hughes, the larger company, will be the surviving entity in the deal. It will change its name to EchoStar but keep the DirecTV brand. Hughes shareholders will own 53% of the combined company; EchoStar holders will wind up with 36% and GM with 11% and the option to convert 100 million shares into debt.
Agreement calls for EchoStar shareholders to receive 1.3699 shares of the new company in exchange for each share in hand. It values Hughes shares at $18.44. Of the $5.5 billion in total cash financing, $4.2 billion will go to GM.
Along with regulators, GM and Hughes shareholders must also approve the deal, and the IRS needs to greenlight it as a tax-free spinoff. Execs said they expect all approvals will take nine to 12 months.
In today’s trading Hughes shares fell 6.2% to close at $14.40; GM stock was down 4.8% to $43.24; EchoStar was down 4.6% to $24.10; News Corp. dropped 6% to $27.31.
(Pamela McClintock in Washington, D.C., and John Dempsey contributed to this story.)