Rupe sits out sat

Backs off bird biz in $1.1 billion Primestar deal

NEW YORK — Rupert Murdoch officially abandoned Wednesday his plans to become a player in the U.S. satcasting business, selling News Corp.’s satellite interests to Primestar Partners for $1.1 billion.

The deal is expected to begin the rehabilitation of Murdoch’s News Corp. on Wall Street, where the company has been ostracized by institutional investors in recent months because of its big spending on acquisitions and plans for an expensive sat-TV service.

Also calming investors’ nerves Wednesday was News Corp.’s announcement that it would, as expected, buy International Family Entertainment. But not anticipated was the revelation that the deal will be done through a joint venture at minimal cost to News itself (see separate story).

News Corp.’s sale of its satellite interests to Primestar had been anticipated for past several weeks, after Murdoch’s sat-TV alliance with EchoStar Communications Corp. collapsed last month over management conflicts.

But the final agreement was a stunning backdown for Murdoch, who had been under pressure from cablers and Wall Street for months over his plans to spend billions of dollars on a satellite TV business which could take on the cable industry.

The February announcement of the EchoStar deal alienated the cable industry and hurt Murdoch’s chances of getting carriage for his cable networks like Fox News Channel. Collapse of the deal upset News’ shareholders because Murdoch hinted he might go it alone in satellite TV, which could have been enormously expensive.

Instead News Corp. is giving up completely. The company is to exchange its satellite license and two high-powered satellites, owned with its telco partner MCI Communications, for a 30% non-voting stake in Primestar. The value of the stock News Corp. received is equivalent to its cost plus accrued interest, the company said.

In addition News Corp. is selling its Arizona uplink facility to TCI for its cost — about $150 million — and plans to sell another two partly built satellites.

News Corp. won’t have any seats on Primestar’s board and no role in the management of the company. That gives Murdoch no incentive to hold onto the stake, and News Corp. hinted to Wall Streeters Wednesday that it planned to eventually sell the Primestar interest. News Corp. execs could not be reached for comment late Wednesday.

“Its a complete capitulation,” said Lehman Bros. analyst Larry Petrella, who added that this was great news for investors concerned over the extent of News Corp.’s financial exposure to the satellite industry. News Corp. stock closed up 25¢ to $18 Wednesday, and early this morning in Australia the stock was trading 5% higher.

News Corp. investor relations exec Bill Sorenson told a conference call for Wall Street analysts Wednesday that the deal “minimizes the capital and earnings risk associated with this business which had been of great concern to many of you.”

Sorenson added that News Corp. was “delighted to be working with the cable industry and looks forward to continuing our efforts to increase the penetration of our cable programming services.”

But Murdoch failed in his efforts to get any commitment from the cable operators who own Primestar to agree to carry the News Corp.-owned cable networks FX and the Fox News Channel on the operators’ cable systems. FX is available in only about 31 million homes and FNC in only about 19 million, well below the 60 million to 70 million subscriber count of the mass-circulation cable networks.

Sorenson told analysts that while there were no cable carriage agreements as part of the deal, “we will gain carriage of the Fox News Channel on Primestar” next year.

In contrast, the deal is much more favorable to Primestar, which is jointly owned by several cable operators led by Time Warner and Tele-Communications Inc. At a news conference in Gotham Wednesday — from which News Corp. execs were conspicuously absent — Primestar chairman/CEO Jim Gray said Primestar will use the News Corp. assets to expand its distribution capacity from the current 160 channels of programming to 240 channels by next summer.

The News Corp. satellite assets allow Primestar to switch from the medium-powered service to high-powered, in line with the leading sat-TV operator DirecTV. High-powered service requires much smaller satellite dishes which are more appealing to consumers.

“Medium-power-satellite requirements have hampered our development,” Gray said, referring to the unwieldy 36-inch dishes that subscribers have had to buy to get Primestar’s current service. DirecTV has so far signed up more than 2.6 million owners of small dishes compared with Primestar’s 1.8 million subscribers, even though Primestar is the only sat-TV operator that doesn’t require consumers to buy the dish upfront.

Primestar’s new high-power satellites will allow it to move beyond the rural areas where it had to focus because of the bulky satellite dishes. “We’re now poised to attack the entire 100 million household universe,” said Dan O’Brien, who has resigned as president of satellite services for Time Warner to become president and chief operating officer of Primestar.

At the same time, Gray is retiring as chairman of Primestar. The management changes and the News Corp. deal coincide with Primestar’s long-planned restructuring from a private partnership to a publicly traded company.

The cablers who now own partnership interests in Primestar will become shareholders, led by TCI Satellite Entertainment (37%), Time Warner/Newhouse (30%), Media One (formerly Continental) (10%), Comcast (10%), Cox (9%) and GE Americom (4%).

Because News Corp. will no longer be a potential competitor to the cable industry, the deal faces big regulatory questions. Unlike DirecTV, Primestar has not previously gone after cable customers aggressively — an issue which will likely be spotlighted by regulators.

But Gray insisted Primestar would be more competitive in future. “We’ll pursue all of the urban and suburban cable markets because we’re now a public company. Our public shareholders will demand” that Primestar try to get people to cancel their cable subscriptions and buy Primestar-compatible satellite dishes, he said.

Grey said that among the new services that will fill the 80 extra channels to come online next summer will be out-of-market professional sports events, pay-per-view movies, more multiplexed pay-TV networks, ethnic channels and business and educational services.

As a result of the buyout of News Corp.’s satellite assets, “I expect to have ready access to the financial markets to finance our growth,” Gray said.

Grey said Primestar has no plans to try to offer local TV stations to Primestar subscribers — an offer that helped to trip up Murdoch and EchoStar. Various sources say Primestar would need more than 1,000 extra channels to make local stations available for retransmission to satellite-dish owners. And Primestar would have to pony up tens of millions of additional dollars to the stations for permission to retransmit their signals, and millions more to the Copyright Royalty Tribunal to compensate the owners of the programming that runs on local TV stations.

Gray said Primestar has hired John Goddard, a director of TSAT who’s the former CEO of Viacom Cable, to serve as chairman of the transition committee that will work on Primestar’s transformation to a public company. When the transition is completed, Primestar will recruit a new chairman and CEO to replace Gray.

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