NEW YORK — Its partnership with News Corp. apparently dead, sat-TV operator EchoStar Communications Corp. warned Monday it would run out of money to continue operating by the end of the second quarter unless it negotiated a new deal with another partner.
EchoStar also confirmed Monday that it had expanded a lawsuit it filed against News Corp. late last week to include a breach-of-contract action against the media giant seeking $5 billion in damages, representing EchoStar’s estimate of the profits it has lost as a result of News Corp.’s actions.
EchoStar claims News Corp. has repudiated its agreement to invest $1 billion in the sat-TV operator for a 50% stake. News Corp. also intended to merge its ASkyB sat-TV business into EchoStar, so collapse of the deal will force News Corp. to either find a new partner for ASkyB or give up on plans to enter the satellite TV industry in the U.S.
News of the latest development sent EchoStar stock down 50¢ to $13.12 Monday while News Corp. stock dropped 12¢ to $18.62.
Sky is falling
News and EchoStar were supposed to jointly run their sat-TV business, to be renamed Sky. But EchoStar claimed in its complaint, filed with a Denver court Friday evening, that News Corp. chief operating officer Chase Carey met with EchoStar chairman Charlie Ergen at Denver airport last Tuesday and said News Corp. would only proceed with the deal “if Ergen resigned as CEO of EchoStar and was replaced by a News Corp. designee with News Corp. in operational control.”
“Carey informed Ergen that if he refused that request, then contrary to the agreement, News wanted to go its separate way,” the complaint said. Ergen said he wanted to stick with the original deal and asked Carey to reconsider, and the News Corp. exec said he would call the next day but did not, the complaint added.
EchoStar also alleges in the complaint that negotiation of the original joint venture was rushed by Murdoch’s desire to announce the deal at a Feb. 24 presentation to investors and Wall Street analysts in Los Angeles (as occurred). EchoStar said it agreed to the timing only if the agreement was drafted “to be so clearly binding that neither party could escape its obligations.”
A News Corp. spokesman declined comment on the allegations in the complaint Monday and said the media company would “still like to work something out” with EchoStar.
News Corp. has been unusually quiet about the dispute since EchoStar revealed April 28 that News Corp. was threatening to back out of the joint venture unless Ergen gave in on certain technology issues. EchoStar said in the complaint that News Corp. had refused to provide a clear assurance of its intention to go ahead with the deal.
EchoStar said it believed News Corp. had “internally made the decision that it no longer intended” to invest in EchoStar, but deliberately did not “take a clear position” in negotiations in the past two weeks.
That appears to have changed late last week, when EchoStar invoked a provision of the joint venture agreement, and asked News Corp. for a loan to allow it to keep operating. EchoStar first asked for $200 million — the amount News Corp. is obliged to lend EchoStar if their deal had not been completed by May 1 — and reduced that request to $100 million by Friday, EchoStar said.
“News responded that it would not loan the money nor would it proceed forward with filing the documents necessary for regulatory approval of the transaction,” the complaint said.
EchoStar is now facing a cash crunch. It said in an SEC filing Monday that “as a result of the failure by News Corp. to honor its obligations under the agreement, EchoStar does not currently have adequate capital to continue its contemplated business plan beyond the second quarter of 1997,” which finishes June 30.
The filing shows that EchoStar’s reserves of cash and marketable securities were almost halved in the first quarter, dropping from $58 million at the end of December to $33.9 million at the end of March. The sat-TV company’s net losses, which have blown out over the past year as it has been building up its subscriber count, hit $63 million in the first quarter, up from a $7.5 million loss a year earlier.
EchoStar said it needs an extra $305 million to meet payments it is obliged to make on its first four satellites and to build and launch additional satellites. It said it had begun looking at financing options, including with “other potential strategic partners who had indicated interest” in a deal before the News Corp. venture was agreed upon.
Ergen is believed to previously have had talks with financial investors, the long-distance telco Sprint and Microsoft co-founder Paul Allen, who is a minority shareholder in rival sat-TV service USSB. Wall Street sources said Ergen may be able to attract some of these people back to the negotiating table, but a deal would depend on Ergen’s willingness to be flexible —which he has not been previously.
It is also possible Ergen will give in to some of Murdoch’s demands, an option that News Corp. apparently has not ruled out. EchoStar clearly thinks this is Murdoch’s plan, asserting in its complaint that “News Corp. engaged in this course in order to place EchoStar in a weakened condition such that it would have to make a choice — either succumb to the demands of News Corp. or suffer substantial financial harm.”
“That would be pretty hardball, even for Murdoch,” said one investment banker Monday.