Satellite TV deal faces review

EchoStar bids to buy Hughes for $30 billion, create industry giant

October 30, 2001|By Stacey Hirsh | Stacey Hirsh,SUN STAFF

In a deal that experts said will face tough scrutiny from regulators, EchoStar Communications Corp. agreed yesterday to buy General Motors Corp. subsidiary Hughes Electronics for more than $30 billion.

The deal would create a satellite television giant with more than 16.7 million subscribers, if it goes through.

But that's a big if.

"The regulatory hurdles are high, and it's not a done deal until the [Federal Trade Commission] and the [Federal Communications Commission] sign off on it," said Adi Kishore, an analyst with Yankee Group in Boston. "And at the very least, that's a very big question."

The acquisition is expected to close in the second half of 2002. Combining the two pay-television companies - EchoStar, which sells a DISH satellite television network, and Hughes, which offers DirecTV - would create a business with more subscribers than the nation's largest cable provider.

It would cost EchoStar about $24.3 billion in stock, plus another $4.2 billion in cash. The company would also assume $1.8 billion in debt.

The new company would keep the EchoStar name. Its services and products would bear the DirecTV brand.

Whether the deal will pass muster with regulators is difficult to predict.

One argument is that direct broadcast satellite systems, or DBS, compete in a broader market that includes cable television, said Martin L. Stern, a Washington attorney and former deputy chief of the FCC's competition division. In this argument, the new company is a relatively small competitor for cable television.

But the other side of that debate is that competition among DBS providers is important. "The commission, in particular, may have some problems with a single entity controlling all of the licensees in this service," Stern said.

Also, Stern said, the FCC and the Department of Justice have been interested in competition to cable, which has about 70 million subscribers. So, would the new company fall into the market of just DBS, or a market that also includes cable and high-speed broadband access?

"The real question in this deal is how broadly do you define the market," Stern said.

The announcement of Echo- Star's agreement with Hughes comes after Rupert Murdoch's News Corp. withdrew its long-standing offer for Hughes over the weekend.

Yesterday's news sent stocks of the three companies involved sliding. Shares of EchoStar closed at $24.08, down $1.18; General Motors closed at $42.76, down $2.64; and Class H shares of Hughes closed at $14.36, down 99 cents.

Hughes Electronics officials believe the deal will be approved by regulators.

"We and GM looked at it very carefully from that perspective, and we are very confident that it will receive regulatory approval," said company spokesman George Jamison.

The new company, he said, will mean more options for consumers. Broadband services to the home, for instance, could be rolled out more aggressively, and there could be more channels available to customers.

"There are entrenched cable monopolies all over the country," Jamison said. "This is a win-win situation for consumers because it will stimulate the growth of products."

But if the deal goes through, EchoStar would become a monopoly in rural areas where cable providers either can't string their networks or don't have updated networks, Kishore said.

To sell the deal in Washington, the companies will have to show that the new company will foster the adoption of technology and bring new toys to consumers, said Matt Harrigan, a senior analyst who follows both companies for Janco Partners Inc. in Denver.

"You have to show that this is good for America in a certain sense," he said. The Republican government could help the companies, Kishore said.

"We've seen over the last year or so that they've been in charge, that they've made a conscious effort to sort of step away from regulating things closely," he said.

"The question is really whether that will be enough to address some of the regulators' concern or whether they'll just turn it down flat like the Sprint-MCI deal," Kishore said.

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