Pegasus buys rival DirecTV franchisee

Pegasus Communications Corp. agreed to buy Digital Television Services (DTS) for $250 million in stock and assumption of debt Thursday, making Pegasus a major force in the sale of DirecTV service to rural markets.

DirecTV, the sat-TV operator, sold franchise rights to sell its service to rural markets in 1993 rather than selling the service directly as it does in urban areas. Over the past couple of years, Pegasus has been buying up many of the 250 franchisees.

Pegasus had become the leading franchisee before Thursday’s deal, with about 130,000 subscribers, while DTS was the second biggest with 120,000.

Thursday’s deal gave Pegasus control over half of the rural markets, which should give it substantial influence with DirecTV itself and make it a takeover target, analysts said. Pegasus noted that DirecTV has sold much better in rural markets than urban areas, reflecting cable’s relatively poor penetration in rural areas.

“Strategically, it’s an incredibly significant deal” for Pegasus, said one analyst. Pegasus stock jumped $1.50 to $21.50 Thursday.

Pegasus will issue 5.5 million shares to DTS shareholders, worth roughly $110 million at $20 a share price before the deal was announced, and assume about $140 million of DTS’ debt.

“This transaction is the strategic centerpiece in our effort to consolidate” the rural franchisees, said Pegasus CEO Marshall Pagon. He said the combined company would serve 8% of DirecTV’s 3 million subscribers as well as reach almost half of DirecTV’s franchise areas.

“Our scale will now allow us to take advantage of significant economies in our marketing, customer service and support operations,” Pagon said.

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