DirecTV back on sale table

NEW YORK — Regulators drew the curtains Thursday on EchoStar’s attempts to merge with DirecTV, and tacitly ushered in an almost certain second act of Rupert Murdoch’s U.S. satcasting play.

The News Corp. CEO is still playing coy at the moment, but the anticipation is almost palpable over at News headquarters.

Such a second chance to acquire DirecTV, owned by Hughes Electronics, would be a consumation devoutly wished by Murdoch, the pioneer and reigning king of global satellite pay TV. And the encore performance is bound to be more riveting than the first installment one year ago, when EchoStar’s fiesty Charlie Ergen yanked it from Murdoch’s grasp in a frenetic bidding war. In the interim, News Corp.’s balance sheet has grown stronger and the Aussie media mogul can afford to be more flexible — and patient — in his dealmaking.

Officially, News Corp. sources say there are no plans for re-engaging in discussions with Hughes about DirecTV. Legally, neither party is permitted to talk to each other until the Hughes and EchoStar contract expires Jan. 21.

But in some respects, News Corp. never really left the negotiating table. Murdoch is known to have let behind-the-scenes lobbyists do the dirty work of campaigning against of the ills of a single national satcaster, while News itself could distance itself from any interest, circuitously bargaining down the price of its desired asset.

Either way, Murdoch is sitting pretty.

“It’s hard to imagine anyone happier about the failure of a merger than Rupert Murdoch is at this point,” said Jim Stroud, president of media research firm Blackbird Communications.

But Murdoch doesn’t necessarily have the field to himself. Hughes could opt to retain DirecTV if a new offer fails to light its fires, while another buyer, such as John Malone’s Liberty Media, could emerge. A consummate opportunist, Malone has a long track record of picking up distribution assets on the cheap and using them as building blocks for his global network of properties.

Nor is it entirely out of the question that EchoStar could be a takeover target, especially considering its stock price has slid by more than 40% since the beginning of the year.

Unfortunately, many of its would-be suitors in media content and distribution — names like Disney and Viacom — have financial troubles of their own at the moment. And Vivendi Universal, which took a 10% stake in EchoStar for $1.5 billion in December, is now far more concentrated on selling off assets to avert a major cash crunch.

In the meantime, Rupert Murdoch’s company has grown more fit, more patient and better able to do a DirecTV deal that in the end might prove better for itself and Hughes. At the very least, News may pay less for the satcaster than it would have over a year ago, and pile on a lot less debt. The company’s leverage has dropped from $9.5 billion in debt a year ago to $7.8 billion today, with a tidy $2.7 billion in cash on the balance sheet. It also recorded a healthy $1.5 billion in free cash flow for its fiscal year 2002 that ended in June.

Ergen won’t walk away entirely defeated since he at least kept his chief competitor in limbo for a year, while getting a bird’s eye view of their financials and operating strategy. Two long years of negotiations has undoubtedly harmed Hughes’ morale and depleted its corporate ranks. It has put the entire company and DirecTV in a state of limbo. The original goal for selling DirecTV was for parent General Motors to cash in on its 30% stake in Hughes in order to raise cash to replenish its underfunded pension. Now shareholders will have to wait several more months before Hughes can reopen negotiations with News Corp.

In the meantime, EchoStar is now faced with the prospect of trying to wriggle out of its $600 million kill fee to Hughes if the deal does ultimately collapse by January.

Few doubt that Ergen will fight the obligation to pony up a $600 million termination fee laid out in the original agreement.

DirecTV execs say the charge is iron-clad, but Ergen at a satcasting conference Wednesday countered that nothing is set in stone. Depending on the cirucumstances, he said, DirecTV could even come out of the divorce owing EchoStar money.

Regardless of the outcome, satellite-industry watchers say Ergen may already be steeling himself up for a fight.

“All indications are that he will be on the hook for the money,” says Stroud. “But he has shown more than once in the past that he is more than willing to take things to court to prove his side.”

The other vestige of the EchoStar-DirecTV tie-up that remains in limbo is satellite operator PanAmSat, which Ergen agreed to acquire from Hughes for $2.7 billion as part of the deal, buying out Hughes’ 80% stake in the company. Price reps $22 per share in cash and stock for PanAmSat, which is trading at just over $17.

Stroud argues that if Ergen agrees to follow through on the PanAmSat commitment, he may be able to turn a quick profit by reselling it to a rival operator like Europe’s SES Global, which has long been eager to test the U.S. market. Such a turnaround could soften the blow Hughes’ $600 million kill fee, he noted.

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