Hughes Direct Tv

Almost a year ago, EchoStar Communications Corp. made the winning bid for Hughes Electronics Corp, beating the bid made by Rupert Murdoch's News Corp. On October 10th of this year, the Federal Communications Commission ruled against the $26 billion deal, the first time the FCC has blocked a major deal since the 1970s. The FCC announced that all four of its staff members voted to reject the deal and that the decision has been sent to an FCC law judge for review. It is not considered likely that the administrative judge will overturn the decision. In addition to the FCC's ruling, the deal is still being evaluated by the Department of Justice.

The FCC ruling doesn't mean that the deal is over. Hughes and EchoStar have a 30-day period in which to make new proposals to the FCC. General Motors, which owns 30% of Hughes and is involved in the merger negotiations, stated "We will continue to work aggressively within the context of this FCC process to achieve approval of the merger." Blair Levin, a regulatory analyst at Legg Mason and a former FCC chief of staff, summed up the situation a little less optimistically. "It would be premature to conclude the deal is dead," Levin remarked, "You would have to say it's on life support, in critical condition, and very unlikely to recover."

The FCC's objection is based on the merger of EchoStar and DirecTV, the satellite television unit of Hughes Electronics. DirecTV is the nation's largest satellite TV service provider and a direct competitor to EchoStar's DISH network. DirecTV and EchoStar are the only two nationwide satellite TV operators. The FCC ruled the merger would harm competition in the multichannel video program distribution market, creating the potential for higher prices and lower service quality.

Satellite TV programming competes directly with cable television. In most markets, consumers who want the programming have three options: DirecTV, EchoStar, and their local cable service. If the merger goes through, there will only be two choices. In rural areas where cable service is not readily available, the combined Hughes/EchoStar company would be the only choice. Hughes and EchoStar responded by proposing that prices in those markets be nationally regulated.

EchoStar and DirecTV have also expressed a willingness to make concessions to get the deal approved. One possible concession would be the allotment of some of EchoStar's broadcast spectrum to a new entrant in the satellite TV market. Cablevision Systems Corp. has expressed interest in acquiring satellite broadcast spectrum for this purpose.

The argument that the merger would eliminate all competition in areas that don't have cable service has an interesting flip side. Malcolm Wallop, a former U.S. Senator from Wyoming, argued in a recent Wall Street Journal article that since there is no economic impetus for cable companies to provide broadband service to farmland and other rural areas, satellite service is the only way those areas will ever receive digital broadband. The merger of EchoStar and DirecTV, Wallop contends, would create one company with the capacity to offer broadband digital services along with television programming via satellite.

"This merger would be a free-market solution to the digital divide problem," Wallop writes. "It would make affordable broadband digital services as easily available to rural areas as satellite television programming is now. No new government programs, fees, or subsidies would be required."

If the Hughes-EchoStar deal cannot be salvaged, EchoStar would be expected to pay a $600 million breakup fee.

Furthermore, to protect itself against the possibility that the deal might be rejected by federal regulators, General Motors negotiated an agreement that requires EchoStar to purchase Hughes' 81 percent stake in PanAmSat Corp for about $2.7 billion if the larger deal isn't closed. EchoStar may argue that PanAmSat has decreased in value since the deal was signed late last year. This would allow EchoStar to invoke the material adverse change clause in its contract to avoid purchasing PanAmSat. Time and energy spent on a battle over breakup fees and conditions instead of getting back to business may also leave DirecTV vulnerable to other potential buyers, including Rupert Murdoch's News Corp.

Sources: Cablefax, Communications Today, Hoovers, New York Times, Wall Street Journal

It is illegal under Federal copyright law to reproduce this publication or any portion of its contents without the publisher S permission.

By Andrew Dolbeck

Editor

Copyright NVST, Inc. Oct 21, 2002
Provided by ProQuest Information and Learning Company. All rights Reserved

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