NEW YORK — Defying enormous odds, Charlie Ergen’s EchoStar Communications emerged Sunday night as the winner in a dramatic battle for the U.S. satellite TV market.
A wild weekend of final negotiations that saw Rupert Murdoch suddenly pull out of the bidding, continued late last night with General Motors reaching the broad outlines of a deal to sell its DirecTV subsidiary to EchoStar. Meanwhile, the No. 2 satcaster scrambled to put the final touches on billions of dollars of cash financing to bolster its $25.8 billion bid. Details were still being hashed out late Sunday and neither party had made an announcement of the deal.
A combination with DirecTV would hand EchoStar virtually all of the nation’s 16-plus million satellite subscribers, and would face significant regulatory hurdles. Consumers in rural areas with no access to cable would have only one choice of a pay-TV provider — a point which News Corp. lobbyists had vigorously attempted to drive home in Washington, D.C., in order to drum up support for Murdoch’s offer and undermine Ergen’s.
EchoStar insisted that regulators should consider the entire pay-TV market, including cable. Its bid also offered more of a premium than News Corp.’s, which was worth an estimated $22 billion.
However, financing seemed to be a problem on Saturday morning, when the General Motors board of directors assembled in Gotham. Word went out to News Corp. that the contest for DirecTV was won because EchoStar hadn’t yet raised enough cash.
But hours later, the automaker’s board adjourned with no verdict as EchoStar appeared closer to finalizing $4 billion-$6 billion of financing with UBS Warburg and Deutsche Bank. In a stormy display of exasperation, Murdoch yanked his offer for Hughes Electronics, which houses DirecTV.
News Corp. execs insisted their action was not a bargaining ploy.
“At a certain point, you’ve got to say enough is enough,” said one News Corp. insider. “We negotiated this in good faith. We met every one of their conditions. It was obviously a ploy by GM to buy more time for Charlie,” he added, referring to EchoStar chairman-CEO Ergen.
“We have no option but to withdraw immediately our fully negotiated and financed proposal,” Murdoch said in a statement. “With this saga finally concluded, we will return with renewed vigor and sharpened focus to maximizing our worldwide media businesses,” he said, acknowledging that 18 months of tortuous negotiations had started to take their toll.
News Corp., apparently out of the DirecTV competition, is left without an important U.S. component to its worldwide satellite empire, which Murdoch envisioned linking together and taking public under a new banner, Sky Global Networks.
“It was a high-risk decision for GM,” said one Wall Streeter. The company, by not striking a deal sooner, has already has seen the value of a potential merger shrink along with Hughes’ stock price as the market headed south in recent months. A deal done a year ago would undoubtedly have been more lucrative for GM.
Should EchoStar and GM fail to consummate an agreement, Murdoch would be in a strong position to come back to the table on his own terms.
Wall Streeters and industry players alike have found the entire DirecTV auction process mystifying — with analysts handicapping odds daily. “I’m hearing 70-30 for Murdoch,” said one fund manager on Friday.
News Corp. investors were counting on a deal, anticipating Murdoch could turn the aggressive salesmanship and marketing he’s demonstrated in the U.K. newspaper and U.S. TV biz to give the still fledgling satellite industry a big push forward.
They also felt a deal would boost the company’s stock, partly by transferring a host of complex international assets into the new Sky Global Networks. The deal would have put Fox’s huge content factory at the disposal of a giant U.S. distribution outlet that could be linked to other News Corp. satellite operations, including BSkyB in Europe and Star TV in Asia.
Sky Global, with its small staff Stateside, has been waiting for a U.S. component before its official launch and IPO.
“We always said we needed an American presence to make it a more compelling company but that (a DirecTV merger) wasn’t necessary to taking it public,” said one exec. “We’d been pretty focused on concluding the deal,” he added.
In fact, for many months, News Corp. was DirecTV’s only suitor, with an undisclosed stock and cash offer now estimated at $ 22.5 billion.
While public interest groups and some lawmakers worried about Murdoch’s growing empire, the combination seemed likely to pass regulatory scrutiny since News Corp. owns no satellite or cable systems in the U.S. And many felt that tension between News Corp. and Hughes, which might have slowed talks early on, would ease after Hughes chairman Michael Smith resigned in May.
Ergen, who was initially rebuffed by GM management, entered the race for DirecTV in August with an unsolicited all-stock bid. While GM seemed lukewarm, shareholders demanded the offer be given equal consideration.
“A plague on … their birds”
Many think it highly dubious that antitrust authorities at the FCC and the Dept. of Justice would greenlight a merger between the nation’s only two satellite companies.
“A plague on both their birds,” joked Jeff Chester, head of the Washington, D.C.-based Center for Digital Democracy. “If Ergen is successful, we’re going to be calling it the Dead Star because it won’t get through intense opposition” from interest groups and politicians, he predicted, even in the capital’s current business-friendly climate.
Ergen’s deal promises a $500 million breakup fee if the merger falls through plus the acquisition of Hughes’ PanAmSat unit for about $5 billion.