AOL May Be Contender in Purchase of DirecTV

America Online Inc. executives are scheduled to meet next week with officials from Hughes Electronics Corp. to discuss the sale of Hughes’ DirecTV, according to people familiar with the negotiations.

The meeting will be the first between the two companies since AOL signed a confidentiality agreement in November with El Segundo-based Hughes. The agreement entitles AOL to look at Hughes’ detailed financial statements. News Corp., Viacom Inc. and Comcast Corp. also signed such agreements.

The development comes as a sensitive and prolonged regulatory review of AOL’s pending $100-billion acquisition of Time Warner Inc. is expected to be voted on Thursday by the Federal Trade Commission.

The Time Warner-AOL deal has raised serious concerns that combining the dominant Internet provider with a top cable operator and the world’s largest entertainment company will create an Internet and television gatekeeper with unprecedented powers over content.

The talks with Hughes could mean AOL is a dark horse contender in the ongoing bidding for the nation’s leading satellite television provider. News Corp., which has held several in-depth negotiations concerning DirecTV, remains the most serious suitor.

AOL officials would not comment. Hughes officials would only confirm that the company is exploring all options including a sale.

Several executives close to the DirecTV situation downplayed the significance of the upcoming meeting with AOL. They said that companies routinely sign up for a behind-the-curtain look at a competitor’s business when a sale opens up the opportunity. Neither AOL Chairman Steve Case or Chief Operating Officer Robert Pittman are expected to attend the meeting.

Analysts said the scheduled talks also could signal a breakdown of a year-old alliance between AOL and DirecTV. AOL invested $1.5 billion in Hughes just months before announcing the Time Warner acquisition and has fallen behind in rolling out high-speed Internet and interactive television services jointly with DirecTV.

Others, however, say DirecTV is AOL’s backup plan should regulators block the Time Warner purchase. They say some within the AOL camp are even pushing to sell the cable properties if the Time Warner deal is completed in favor of satellite distribution.

“I can’t believe this is anything more than a hedge or an exploratory conversation,” said David Nall, a partner in the telecommunications practice of Squire Sanders & Dempsey, a Washington law firm. “It would be a real regulatory problem to see consolidation between a major satellite broadcaster and a top cable operator.”

Regulators have previously forbidden any consolidation of cable and satellite TV interests for anti-competitive reasons. Time Warner is the nation’s second-largest cable operator, serving 11.8 million subscribers, while DirecTV is the country’s leading satellite service, with nearly 10 million customers.

But other executives with knowledge of the negotiations say this is a risky gambit that symbolizes AOL’s take-no-prisoners operating style. It also points to possible strategic divisions within the Time Warner--AOL camps.

In June 1999, after a yearlong fight to force the cable industry to open its high-speed networks to Internet service providers other than its own, AOL invested $1.5 billion in Hughes to secure an alternative high-speed pathway to the Internet over satellite. AOL’s pokey telephone dial-up service could be hurt by rival broadband services offered by cable.

Hughes, a subsidiary of General Motors Corp., hired investment bankers this fall to explore a sale. GM was under pressure from Wall Street and corporate raider Carl Icahn to raise its sluggish stock price.

But in the meantime, AOL agreed in January to buy Time Warner and has struggled in Washington to get approval of the purchase. The FTC’s hard-line stance against the merger has led to concessions. Time Warner already has agreed with the FTC to lease space on its high-speed cable facilities to Internet providers other than AOL, with a recent deal with EarthLink serving as a template.

Earlier this year, rumors circulated that AOL would sell Time Warner’s cable operations after securing a long-term carriage contract and establishing “open access” as a national policy. Some Washington sources say that is another possibility behind AOL’s interest in DirecTV. In fact, cable sources say they have received informal inquiries from AOL investment bankers about their interest in buying Time Warner’s cable properties, which are the cream of the crop, worth more than $50 billion.

Some within AOL see DirecTV’s potential for reaching all of the nation’s 100 million households as more valuable than Time Warner’s more limited reach of 19 million homes, according to sources close to the talks. However, experts agree that cable’s two-way high-speed connection to households is superior for delivering interactive services.

Gerald Levin, the Time Warner chairman who would be chief executive of the new company, has banked his career on the promise of cable. One source familiar with the AOL-Hughes meeting next week characterized Levin’s position on a DirecTV deal as an “over my dead body” issue. He said Hughes had refused to show AOL its books until Levin is on board with the negotiations. It is unclear whether Levin has given his consent.

AOL sources say the meeting could focus on its existing pact with Hughes. The companies have told analysts that they will not divest their passive Hughes investment to win regulatory approval of the Time Warner purchase.

Executives close to the negotiations say News Corp. remains the only serious DirecTV suitor and that Hughes is desperately trying to stoke a bidding war to drive up the price tag.

They say the deal has stalled because of GM’s unreasonable demands. GM is looking for a $45-billion price tag and $9 billion of the total in cash, with the remainder in a blue-chip stock currency that News Corp. does not possess.