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EchoStar-Hughes Far From a Done Deal

30 Oct, 2001 By: Staff Reporter

EchoStar Communications Corp. might have agreed to buy its top U.S. rival satellite TV provider, General Motors' Hughes Electronics unit, for $31.4 billion in stock, cash and assumption of debt, but the companies are a long way away from closing thetransaction.

Under a deal announced late Sunday evening, EchoStar would own 91% of the total U.S. satellite TV market, a number that has many concerned that the deal won't pass muster with antitrust officials.

Charlie Ergen, c.e.o. of the current and future EchoStar, firmly believes that the joint venture will clearregulatory hurdles. He's counting on antitrust officials to view the merged company as part of a broadermultichannel market that includes cable operators. In fact, EchoStar has agreed to pay General Motors $600 million in breakup fees if the deal fails.

"We've looked at every single angle," Ergen said Monday in a conference call to analysts. "We think it's a transaction that will pass."

If it doesn't, News Corp., which dropped out of the negotiating Saturday, might be waiting in the wings. A News Corp. spokesman declined comment, but sources said Murdoch would likely still beinterested. "You've got to imagine that he would be since he had been chasing DirecTV for 18 months," one source said.

The deal will come under two layers of scrutiny from the federal government. Antitrust authorities at the U.S. Justice Department or the Federal Trade Commission will examine the merger for its competitive implications, while the FCC must decide if allowing the deal would be in the public interest.

Thus far, the proposed deal has received criticism from some heavy hitters in Washington. "Congress, the executive branch and federal regulators should review this proposal with a high level of scrutiny," National Association of Broadcasters c.e.o. Edward Fritts said. "This acquisition -- should it go forward -- would increase exponentially the satellite channel capacity of EchoStar. At a minimum,government regulators should condition this deal on a guarantee that this additional satellite channelcapacity be devoted to carriage of the signals of all local television stations."

Although Republicans usually have fewer antitrust concerns than Democrats, one analyst thought the deal would be in for heavy scrutiny even with George W. Bush in the White House.

"We are skeptical (that) the antitrust authorities or FCC would be able to craft a workable remedy that retains the benefits that a competitive marketplace would have on pricing, programming and service quality," said Blair Levin, a Legg-Mason analyst who was former FCC chairman Reed Hundt's chief ofstaff.

Ergen has attempted to solve this issue by proposing a nationwide pricing system in which the new EchoStar would be unable to charge more in rural areas, where it has no competition, than in areaswhere it does.

However, Ergen and company might have already succeeded in gaining the support of some key members of Congress, a crucial component to getting the deal through. According to a spokesman forRep. Billy Tauzin, R-La., chairman of the House Commerce Committee and the lawmaker planned to delve into the merger, Tauzin has met with GM c.e.o. Rick Wagoner, spoken to Ergen on the telephone and was scheduled to meet Monday with DirecTV chairman Eddy Hartenstein.

Tauzin spokesman Ken Johnson said the House Commerce Committee is willing to examine the merger in the context of the entire multichannel marketplace and not simply within the satellite television market.

The deal could also become further complicated if other companies oppose it. According to sources close to the deal, companies with a heavy investment in content could become concerned that the deal would give EchoStar too much power over the satellite delivery of movies, TV shows and other copyrighted works.

Spencer Wang, an analyst at ABN AMRO, believes the proposed merger would have generally negative implications for cable programmers because the combined entity would use its scale to reduce programming costs by lowering affiliate fees to cable programmers.

"We believe that a DirecTV combination with EchoStar (vs. a combination with News Corp.) is more onerous for cable programmers, given that EchoStar does not own cable network assets and thereforedoesn't need to worry about the negative implications for cable network asset value," Wang said.

Some analysts believe the expected long regulatory review of the EchoStar acquisition in Washington will give cable companies an edge in the near term.

"EchoStar will be focused on getting the deal done and will be highly leveraged after the deal, reducing its flexibility to cut prices and launch new services," Buckingham Research Group analyst David Goldsmith said. "And since they will have a monopoly in the satellite business, cable will have a freer ride in Washington (when it comes to potential cable mergers)."

The companies expect the purchase to close during the second half of next year.

The transaction is expected to require about $5.5 billion of total financing, which EchoStar plans to fund in the capital markets before closing. In the interim, the completion of this financing has been backstopped by bridge commitments of about $2.75 billion from Deutsche Bank and of $2.75 billionfrom General Motors, which EchoStar plans to replace in the near future from one or more banks. The GM bridge commitment is secured by a pledge of $2.75 billion of EchoStar stock held by Ergen.

According to sources, UBS Warburg declined to finance the second $2.75 billion because it wanted an out clause based on some very near-term performance metrics that EchoStar was not able toguarantee.

EchoStar shares closed down 5% on Monday at 24.08. Hughes Electronics ended the day down 6% at 14.36.

--Brooks Boliek and Nicole Sperling (Brooks Boliek reported from Washington, Nicole Sperling from Los Angeles. Georg Szalai in New York contributed to this report.)

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