EchoStar in $1.25-Billion Satellite TV Deal

In a deal that could shift the power in the satellite television business, EchoStar Communications Corp. has agreed to buy satellite assets from News Corp. and MCI WorldCom Inc. in a stock transaction valued at about $1.25 billion.

The deal will give the Colorado-based provider more capacity in the sky than market leader DirecTV, allowing EchoStar to add more channels and new Internet services. It also could revive a plan to transmit local broadcast signals that satellite TV services have lacked and have put them at a disadvantage against cable.

The deal would end a two-year struggle by Rupert Murdoch’s News Corp. and MCI to enter the satellite television business, leaving them with a combined 37% stake in EchoStar but only 9% of the voting control.

It marks a major victory for EchoStar Chief Executive Charles Ergen, who had filed a $5-billion breach of contract lawsuit against News Corp. and MCI for backing out of an agreement, struck in February 1997, to form a 50-50 venture with EchoStar. That deal unraveled because of conflicts over control, the high cost to News Corp. of entering the business late in the game and retaliation from the cable industry, which threatened not to carry some News Corp. channels.

In Monday’s transaction, Ergen will drop the lawsuit, retain management control and relinquish no board seats to his new partners. He will own 40% of the company’s common stock and 87% of its voting stock.

“This is a great deal for Echo- Star,” said Jimmy Schaeffler, founder of the Carmel Group, which tracks the satellite business. “EchoStar just went from a 90-pound weakling to a 900-pound gorilla.”

Schaeffler said the deal will give EchoStar about 50% of the most desirable orbital capacity available, compared with 32% of the slots controlled by DirecTV and its partner, United States Satellite Broadcasting Corp.

Satellites placed at these orbital slots are able to send signals to 18-inch satellite dishes located anywhere in the United States.

Wall Street welcomed the news, running up EchoStar’s shares by $3.81 to close at $38.81. MCI WorldCom fell $3.44 to $59, and News Corp. American depositary receipts fell 38 cents to $28.

Yet some analysts still doubt whether debt-burdened EchoStar has the financial strength to continue a prolonged battle for market share. For the first time, the company is giving away its equipment this holiday season to get new subscribers.

Sources said DirecTV, a division of Hughes Electronics that reaches more than 4 million subscribers with its service, had also been negotiating to buy News Corp.’s orbital slots. They said EchoStar, which sells its service under the Dish Network brand to 1.7 million subscribers nationwide, used the leverage of its pending lawsuit to gain an edge. Neither DirecTV nor EchoStar is profitable yet, however, and both are investing heavily to win customers from cable.

DirecTV could file an objection to EchoStar’s acquisition with the Federal Communications Commission on the grounds that it would give its competitor an unfair advantage. Hoping that competition would increase in the industry, the government barred DirecTV from bidding on the slots at the auction won by News Corp. and MCI in January 1996 because it controls the most valuable of three orbital slots that reach the entire country.

Earlier this year, the Justice Department blocked the sale of the News Corp. assets to Primestar Partners, the second-largest satellite TV provider, due to concerns that Primestar’s cable owners would not wage a stiff competitive battle against the cable industry. And News Corp.’s own attempt to buy out Primestar’s cable partners fell apart when financial turmoil in the markets made the deal difficult to finance.

In Monday’s transaction, News Corp. and MCI WorldCom will exchange satellite transmission licenses worth $682.5 million, two satellites worth $450 million, a satellite broadcast facility valued at $100 million and other assets for the 37% stake in EchoStar. The transaction will close next year pending regulatory approval.

The deal would allow News Corp. to sell half of its EchoStar shares in the first year, 30% in the second and the balance thereafter, though the company said it has no plans to do so.

As part of the agreement, EchoStar will carry News Corp.’s Fox News on its satellite network and gain rights to retransmit the programming of Fox-owned TV stations within their respective local markets for three years.

The company Monday downplayed the idea of using the new satellite capacity exclusively to offer local broadcast signals as it had proposed under the earlier merger plan. This time around, EchoStar is stressing such services as pay-per-view channels and high-definition television channels.

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Bloomberg News contributed to this report.