All Eyes On Murdoch

Cable World, Nov 4, 2002

Byline: MAVIS SCANLON, ALICIA MUNDY, K. C. NEEL, STACI D. KRAMER AND SHIRLEY BRADY

At the Federal Communications Commission in Washington, staffers last week were busily preparing for the next round of Who Gets DirecTV? by preparing file folders marked 3M, a waggish rubric for Murdoch, Malone and Microsoft. It was those three that nearly bought DirecTV in early 2001 and are expected to bid again.

By nearly all measures, the proposed merger between General Motors' Hughes Electronics - DirecTV's parent - and EchoStar Communications was rendered dead last week as the Department of Justice and 23 states' attorneys general filed suit to block it. The only questions remaining regarding that deal are how long EchoStar CEO Charlie Ergen plans to spend in court attempting to disentangle himself from a $600 million breakup fee and an agreement to buy Hughes's stake in PanAmSat for $2.7 billion and how desperately GM needs cash.

In what may prove a wise answer to the first question, one government lawyer who would not speak for attribution quipped, "When Charlie signs a contract, that's just the beginning of the negotiation process." The answer to the second, whatever it is, would likely seem more straightforward: GM expected to receive net proceeds from the $26 billion cash and stock sale of $4 billion, which would help shore up its balance sheet and pension fund liabilities. (Fitch, the ratings agency, estimates GM will have to ante up $10 billion in pension contributions over the next five years.)

Scott Lee, a director at Fitch, said he still expects GM to seek a sale of Hughes. "They would like to see some liquid proceeds" from the Hughes unit, Lee said. "That's what the financial community is expecting [for GM] as well."

For the immediate future, however, GM is in a bind, said Scott Hill, an automotive analyst at Sanford Bernstein. GM and Hughes cannot immediately pursue any other options that may be available to them, since the "contract states that EchoStar has the right to exhaust all avenues" to pursue the merger.

GM does have options. Scott Sprinzen, a managing director at Standard & Poor's, said GM could sell its Hughes shares - although Hughes is a wholly owned subsidiary of GM, GM's economic stake is 30% - in the open market, or contribute those shares to its benefit plans. Of course, in the open market "the value won't be anything close to what GM had hoped when the deal was announced," Sprinzen said.

Another likely scenario is that GM pursues another suitor for Hughes. In that case, it may seek to renegotiate the terms of the breakup and the PanAmSat provision.

"What could happen is both parties realize they could get together and negotiate some middle ground," said Hill of Sanford Bernstein. That would enable GM to more quickly line up another suitor or find another way to monetize Hughes assets.

Hill said EchoStar has to tread somewhat carefully in extending any litigation so long that it loses its edge. There is almost no chance any deal could be closed before the end of the first quarter; in that case, Hill said, GM may be better off taking Ergen on and trying to "maximize" the total amount to be gained from Ergen. "After all," he notes, "the merger documents are pretty clear in stating the walk-away conditions."

Another option for GM would be to change the strategic focus of Hughes and DirecTV from growth to cash maximization by maintaining the current subscriber base and increasing cash flow per subscriber. There is also the possibility of a management-led buyout of the unit.

"Clearly they want as much cash as they can get as fast as they can get," Hill said of GM. But "if someone doesn't come up with a compelling offer, they do have options."

Such a compelling offer is widely expected to come from Rupert Murdoch's News Corp., John Malone's Liberty Media and, possibly, Bill Gates's Microsoft. The conventional wisdom has Murdoch's people working on a failed-merger strategy since last year - indeed, many in Washington claim to have seen the hands of News Corp. lobbyists working behind the scenes to scuttle the EchoStar deal. But News Corp.'s strength may come from living the past year as though it would never get DirecTV. News Corp. has more than $2 billion in cash even after paying down $900 million in debt and spending another $400 million on a Chicago TV station.

When asked for comment, a News Corp. spokesman read a statement made by Lachlan Murdoch, deputy COO at News Corp. (and Rupert's son), to analysts last week: "We still think DirecTV is a great asset that would fit strategically with our business. We're not confident it's worth what it was last year. If it comes back - and it's not guaranteed it will come back - we'll look at it seriously."

Liberty is interested, according to COO Gary Howard. "We are always interested in looking at everything, and we'll look at DirecTV either with someone else or alone," Howard said. "We're leaving every door open. But it's a complicated deal. GM must deal with the breakup fees and PamAmSat before they can do anything."