Primestar Drops ASkyB Deal on Antitrust Fears

Primestar Inc. on Wednesday dropped its proposed $1.1-billion purchase of American Sky Broadcast Co., jointly owned by News Corp. and MCI Communications Corp., after it failed to reach a settlement with federal antitrust enforcers.

As recently as two weeks ago, both sides said they were in “serious negotiations” to avert a long court battle by resolving Justice Department concerns the transaction could hurt competition. A Justice Department lawsuit said the acquisition would give the nation’s five largest cable companies control of one of the first real competitors to their regulated monopolies.

“Given the hard-line constraints the Justice Department put on us and the number of parties involved in the transaction, it was hard to bring all the parties to agreement,” said Ken Carroll, chief financial officer of Primestar, the nation’s second-largest provider of direct broadcast satellite, known as DBS.

In a telephone interview, Carroll said the company plans to focus on existing service for its 2.2 million subscribers while seeking to develop high-powered service using a satellite orbit it controls.

Analysts said Primestar needs to expand beyond its current business to succeed. “The economic model does not make sense,” said Ted Henderson, managing director of research for Janco Partners Inc.

Justice Department antitrust chief Joel Klein said the decision to scrap the transaction “will ultimately mean lower prices, more innovation and better service and quality.” The Justice Department beat Primestar in announcing that the transaction had been canceled.

Among possible resolutions that had been considered was a plan by Rupert Murdoch’s News Corp. to buy out the cable industry’s 61% stake in Primestar. Eliminating all cable ownership of Primestar would have satisfied the Justice Department, Primestar’s Carroll said.

Slumping stock prices made it difficult for News Corp. to raise capital for the venture, which may have cost as much as $700 million, said people familiar with the company’s plans. News Corp. on Wednesday announced it also would delay an initial stock offering for its Fox Entertainment Group Inc. until markets settle.

“The cable-Murdoch connection was going to destroy DBS as a competitor,” said Andy Schwartzman, president of Media Access Project, a public-interest law firm that opposed the merger. “Murdoch was going to deny programming to competitors and split up the DBS market.”

Since the government suit was filed in mid-May, Murdoch has been trying to buy out Primestar’s cable owners--Time Warner Inc., Newhouse Broadcasting Corp., Comcast Corp., MediaOne Group Inc. and Cox Communications--to remove antitrust concerns. In a brief statement, News Corp. said it would pursue other options for the sale of ASkyB assets.

Englewood, Colorado-based Primestar said buying ASkyB would enable it to compete with DirectTV and EchoStar Communications Corp. by offering customers small satellite dishes that receive high-powered signals. Primestar’s largely rural customers now receive lower-powered signals with large dishes that are less popular in urban and suburban markets.

Federal antitrust enforcers charged, though, that the cable companies that own Primestar already serve 60% of the homes nationwide and that allowing Primestar to combine with ASkyB would give the companies control over a still-developing alternative to cable TV.

The “odd-man out” appears to be Murdoch, who is part owner of ASkyB’s orbital slot, said Janco’s Henderson. Now that the deal with Primestar is off and an earlier combination with EchoStar fell apart, analysts question what will become of ASkyB.