Hughes Expected to Announce $1.3-Billion Deal for PrimeStar

In a development that would leave two strong U.S. satellite television services to compete against the cable industry, Hughes Electronics is expected to announce today the purchase of all the assets and customers of its second-largest competitor, PrimeStar Partners, sources say.

Under the deal, which has been widely expected, Hughes, on behalf of its DirecTV satellite subsidiary, would pay PrimeStar as much as $1.3 billion in stock and cash for assets that include 2.3 million subscribers nationwide.

In a related transaction, DirecTV would buy certain satellite slots from a separate company controlled by PrimeStar’s cable owners for an additional $500 million.

The deal is expected to be announced today

At least some of the proceeds from the sales will be used by PrimeStar to pay off angry bondholders, which have seen the value of their holdings plunge in the last few months, as it became increasingly clear that the cable-owned satellite service would have to liquidate because of a failing business plan and heavy debt.

PrimeStar is expected to offer bondholders about 70 cents on the dollar.

Neither PrimeStar nor DirecTV would comment on the deal, which would give the El Segundo-based satellite television service about 6.5 million subscribers if all the PrimeStar customers are converted.

The deal could catapult DirecTV into the nation’s top three pay television services, behind Time Warner and Tele-Communications Inc., making it comparable in size with Comcast Corp., which also will serve about 6.5 million subscribers after pending acquisitions.

EchoStar Communications Corp., the other large satellite service, has fewer than 2 million subscribers.

DirecTV had been unwilling to pay a high price for PrimeStar because of the cost of converting its customers to its equipment and the high annual churn rate, about 30%, of its subscriber base. While DirecTV’s customers generally are a wealthy and urban demographic group, PrimeStar’s customers are mostly in rural areas not served by cable. And PrimeStar is a so-called medium-powered service that requires larger satellite dishes than DirecTV because of its weaker orbital slots and signals.

Under the deal, the price DirecTV pays depends on how many subscribers are converted by PrimeStar over a two-year period. The $1.3-billion value depends on the conversion of a large number of PrimeStar’s customers.

Analysts at Carmel Group, which tracks the satellite business, called the deal a fire sale by PrimeStar, worth roughly half of what ASkyB had offered to buy the company’s cable operators last year.

PrimeStar has been struggling since the Justice Department blocked the company’s purchase last year of valuable satellite assets from Rupert Murdoch’s News Corp. and MCI WorldCom. Justice officials worried that the large cable operators that control PrimeStar wouldn’t use those assets to compete aggressively against themselves. As a result, ASkyB attempted to buy out the cable partners, but the deal faltered.

Late last year, EchoStar agreed to buy the ASkyB assets, giving the Englewood, Colo.-based service the bulk of the best orbital slots in the sky.

That has pressured DirecTV to bolster its own artillery. Last month, it agreed to buy its partner, United States Satellite Broadcasting Co., for $1.3 billion.