News Corp., Liberty may team for sat buy

NEW YORK — News Corp. and Liberty Media may be combining forces to bid for a larger chunk of Hughes than previously believed as the race for control of Hughes Electronics’ DirecTV goes into full swing.

Either separately or together, both parties have stated their interest in buying DirecTV on numerous occasions. But it now appears that it will take more than News Corp’s coveted 30% stake in DirecTV parent Hughes to ensure that News Corp. and Liberty can gain a meaningful interest in the satcaster or secure essential board control.

Observers have assumed that News Corp. (with or without Liberty) would seek control of DirecTV parent Hughes in the simplest fashion possible: purchasing outright General Motors’ 30% stake in the Hughes tracking stock that controls DirecTV. But sources close to the companies say that control of the board may require either a much larger premium or a significantly larger share of the equity. Rather than News Corp. and Liberty sharing the tenuous 30% stake, Liberty is believed to be eyeing additional large stakes in Hughes, such as a 6% block held by AOL Time Warner and/or a 13% stake held by a large pension fund.

Logistically, says Lehman Brothers analyst William Kidd, any bid for control of the satcaster will first require recapitalizing the Hughes tracking stock. Most critical for a deal to proceed is an IRS ruling that the share exchange is tax free for Hughes shareholders. Then the boards of GM and Hughes must vote on the offer and agree on a future board composition.

Hughes, which last week relieved former merger partner EchoStar of its obligation to buy its PanAmSat subsidiary for $2.7 billion, needs cash quickly. Having lost more than a year on its doomed engagement to EchoStar, GM is not in a position to be choosy. The conglom needs cash quickly to fill a yawning $16 billion gap in its underfunded pension scheme. In the past GM has said it expects $4 billion for its Hughes stake, a price easily within its current market value of around $4.5 billion.

Assuming a favorable IRS ruling, which could take several months, sources say the GM and Hughes’ boards are ready and willing to approve a transaction to sell control of Hughes and its prized DBS asset sooner rather than later.

The unanswered questions: How much News Corp. is prepared to finance on its own, and how does it intend to divvy up the pie with likely co-bidder like John Malone?.

Merrill Lynch analysts have speculated that Liberty Media may be prepared to contribute $2.25 billion in cash for a 15% stake in the entity.

Murdoch is loath to jeopardize his company’s credit rating to do the deal, but bankers have proposed numerous financial alternatives to help foot the $4 billion Hughes bill. These include issuing additional Fox shares or News Corp. preferred shares or raising debt off of Fox’s more flexible balance sheet. News Corp. currently has roughly $3.3 billion in cash, but it is due to use some of that to purchase Italian feevee Telepiu and possibly buy control of Fox regional sports channels it jointly owns with Cablevision.

One key bargaining chip in the deal may be a resolution of the situation in the Latin American DBS sector. Sky Latin America (owned by News Corp., Televisa and Liberty) and Hughes’ DirecTV Latin America are both losing large sums of money in the economically depressed region. But News Corp. clearly feels it has the upper hand and has been more than prepared to let its rival bleed rather than pay too much for a much-needed merger. Sources suggest a deal to merge the two Latin payboxes will hinge on a deal for the bigger U.S. DBS prize.

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