Sorry, Charlie

Cable World, Oct 14, 2002

Byline: ALICIA MUNDY AND MAVIS SCANLON

There comes a point in every saga where humor and pathos merge. That point came last week in the EchoStar Communications-DirecTV merger when, having just heard that the Federal Communications Commission moved to block the deal, effectively saying it was morte, finito, soooo over, EchoStar frontmen and -women began floating the idea that it could still be resurrected. While the FCC was celebrating the Mass of the Dead, EchoStar lunged unceremoniously for the corpse, pounding away with CPR and re-booting the shock paddles. Afterwards, reading the life-affirming spin from the EchoStar camp, one FCC staffer who begged anonymity said, "I guess they won't believe it unless Michael [Powell] actually drives a stake through its heart."

The rejection throws an immediate spotlight on Rupert Murdoch and News Corp., which is widely expected to make a bid for Hughes's DirecTV, possibly in conjunction with Liberty Media's John Malone. Murdoch's reentry is spreading neuralgia through some quarters of the cable business - Murdoch is first a broadcaster and programmer, and it is feared his presence at the helm of DirecTV could force a long-dreaded schism between cable operators and programmers. However, if Malone and Liberty are involved, cable operators could feasibly wind up with a piece of the venture through the still extant Primestar consortium, led by Liberty, which was rechristened Phoenixstar in 1998.

For EchoStar and DirecTV, a larger question is how to move forward with high-speed Internet access and local channel offerings if they cannot resurrect the deal, either with a new proposal, which the companies are expected to submit in the next 30 days, or in a winning argument before an Administrative Law Judge. The FCC moved to block the deal based on the "staggering" consumer harm that would ensue should the two companies be allowed to merge. The FCC cannot technically turn down the merger, and instead referred it to an Administrative Law Judge. Still, several commissioners expressed skepticism that any revisions would lead to approval.

"There's no easy or quick fix to this," said FCC Media Bureau chief Ken Ferree. "They have quite a hill to climb." A key date is Jan. 21, 2003, the day by which the companies agreed they would close the merger or walk away, with Ergen paying a $600 million breakup fee.

The vote was unanimous, something rarely seen at the agency these days. Bizarrely, the resurrection whispering campaign began when EchoStar's friends interpreted a statement by Commissioner Kevin Martin as secretly signaling support for re-reviewing the deal. Martin, a free marketer, voted with the other three commissioners to kill the merger, and in fact issued a dissent in part, basically complaining that the FCC had not come down hard enough. He also said that, "Failing to fully explore [EchoStar's other proposals] could be a missed opportunity to bring more competitive choices to consumers," which is the flimsy thread to which EchoStar supporters clung. However, EchoStar's vague suggested concessions, and what it would take to move Martin or anyone else at the FCC, say sources there, are worlds apart.

The FCC rejection also underscores a number of issues and wide-ranging ramifications for cable and satellite should Murdoch and Malone - whose dealings in Primestar several years ago led to the collapse of a merger agreement between Murdoch's Sky Broadcasting satellite service and EchoStar - get together once more.

In the immediate future, observers expect a legal tussle over the breakup fee and EchoStar's contractual obligation to pay $2.7 billion for satellite services company PanAmSat. EchoStar CEO Charles Ergen and Hughes chairman Eddy Hartenstein gave differing opinions on whether EchoStar will be on the hook for the breakup fee at an industry event in New York last week. Ergen's stance was that the payment would depend on the circumstances, while Hartenstein maintained EchoStar would be responsible.

"The only certainty is that lawyers will be hired before checks will be written," said Blair Levin, a telecom analyst at Legg Mason in Washington.

Some analysts also question the agreed-upon price of $2.7 billion for Hughes's 81% of PanAmSat, the largest satellite services company.

"In my mind. it's not worth $22.47 a share," said Matthew Harrigan, an analyst at Janco Partners (the stock closed at $19.32 Friday, up 12%). It may make more sense for PanAmSat to remain at Hughes, he adds.

Should the merger die it would throw into question a plan posed by Cablevision Systems chairman Chuck Dolan. Cablevision proposed EchoStar divest a number of satellite frequencies that it would then take over. Cablevision has tens of millions invested in the construction of a state-of-the-art satellite; its Rainbow Media owns 11 satellite slots. It plans to launch the satellite in March and national service in December.

Here's where things get interesting. News Corp. and Cablevision have two programming and sports partnerships, and News Corp. owns the right to put its 40% stake in one of them to Cablevision in December. Could Murdoch and Dolan incorporate some dealing over Rainbow's 11 DBS frequencies when it comes time to negotiate over possible exit strategies in those partnerships?