Boeing Strikes Deal for Hughes’ Satellite Unit

Boeing Co. agreed Thursday to buy Hughes Electronics Corp.’s renowned satellite-production unit and two related businesses for $3.75 billion in cash, bolstering its position as California’s top private employer and as kingpin of the state’s aerospace industry.

The acquisition, which requires approval from regulators, would give Boeing a key role in commercial and military satellite manufacturing at a time when the market for its commercial jets is maturing.

Under the deal, Boeing would absorb about 9,000 Hughes employees, bringing its total California work force to about 46,000. Boeing earlier purchased McDonnell Douglas and the aerospace business of Rockwell International, giving it facilities in Canoga Park, Palmdale, Long Beach, Huntington Beach and Seal Beach, among other areas.

Boeing executives said they did not expect any substantial layoffs from the merger, but said they were considering whether to close an empty Boeing satellite plant in Seal Beach.

Boeing builds the Delta launch system, liquid fuel rocket engines and major portions of the International Space Station, as well as manages operations for the National Aeronautics and Space Administration.

With Hughes as a major subcontractor, Boeing also scored a coup in the satellite arena when it won a $5-billion contract last fall to build spy satellites for the National Reconnaissance Office, beating out rival Lockheed Martin Corp.

Hughes is a major subcontractor on the classified Boeing project, conducting development at its vast El Segundo complex, which is hiring an additional 400 technicians for the work, sources said. Boeing declined to say where the satellites will be built.

In recent years, Hughes has added capacity at the El Segundo operation to handle growing demand fueled by the communications boom in television, data and voice transmissions. It holds 40% of the world’s market for satellites in commercial service.

By selling off its Space & Communications unit, the company founded by industrialist and movie mogul Howard Hughes is in essence making its final break with the aerospace industry after pioneering commercial spacecraft for four decades.

Hughes, owned by General Motors Corp., is restructuring to focus on its high-margin businesses, primarily satellite television provider DirecTV and a broadband network. The restructuring comes at a time when GM is under pressure from Wall Street to spin off DirecTV to unlock the value of the high-growth company and separate it from the underperforming auto maker.

Hughes Chief Executive Michael Smith, who would not comment on speculation of a spinoff, said the satellite sale was driven by the need to finance new technology initiatives to expand DirecTV.

“We don’t have enough money in the cash register” to keep funding both satellite production and expand service businesses, he said. Smith said proceeds from the sale would be used to pay down some of the company’s $2-billion debt, help finance its $1.4-billion investment in the high-speed, two-way satellite initiative called Spaceway, and promote DirecPC, a device for connecting to the Internet via satellite.

Eddy Hartenstein, who turned DirecTV from a concept into a reality as its president, will head a new unit to concentrate on DirecTV, its international operations, and new Internet and high-speed “broadband” services. Jack Shaw, the chairman of Hughes Network Systems, will head a new unit that will include PanAmSat and corporate customers.

Hughes had long touted the benefits of having its own satellite lines to supply the satellite-based services it provides, arguing that being a technological leader in hardware has played a crucial role in its ability to dominate the services business.

But the services are faster-growing and need the cash that Hughes will get from Boeing, said Marco Caceres, an analyst with research firm Teal Group in Fairfax, Va.

“Building hardware is lucrative, but not nearly as lucrative as providing the services,” Caceres said.

Nonetheless, Boeing Chairman Philip Condit said the combined satellite operation “will be our fastest-growing business.” Boeing’s board approved the deal Thursday, Condit said, because it “believes this acquisition is a resounding strategic fit,” and because it provides “an excellent platform for future growth.”

Boeing would manage its satellite manufacturing operations out of the Hughes headquarters in El Segundo. It will be led by Tig Krekel, president of Hughes’ satellite production operation. Krekel will oversee Boeing’s production of Global Positioning System satellites in Seal Beach. Boeing agreed to the purchase after working out concerns about the price--initially about $4 billion--and potential liability over two previous business mishaps involving Hughes.

Amid a Justice Department probe of improper leaks of technological secrets, Hughes took a $92-million write-off last year after the federal government forced it to withdraw its application for a license to build a mobile phone satellite for a consortium of Asian countries, including China.

In the other deal, Hughes had won a $2.4-billion contract with ICO Global Communications of London to build a dozen satellites, but the firm then filed for bankruptcy. Hughes is stuck with four satellites worth $500 million.

Hughes’ Smith said, “Boeing is well protected” from liability under the terms of the acquisition. A person familiar with the deal said Hughes will be responsible for any legal liability resulting from the China technology transfer probe. Hughes’ satellite unit will continue production of the ICO spacecraft, this person said, because the firm is expected to emerge from bankruptcy.

Analysts initially balked at the nearly $4-billion asking price for Hughes. In the mid-1980s, GM paid $5.1 billion for all of Hughes, including its now divested defense electronics operations. Hughes Electronics posted $2.3 billion in satellite sales last year and is expected to report about $2.7 billion this year.

But Boeing executives insisted they didn’t overpay for the firm. Hughes has a backlog of more than 36 satellites with a value of nearly $5 billion. And Boeing said it would be able to write off about $500 million of the price under a new tax regulation that allows deductions for “goodwill,” the premium paid on top of the value of Hughes’ assets.

Analysts also said the Seattle company had little choice but to pay top dollar for the firm because it would have cost even more for Boeing to build a competitive satellite business on its own.

As part of the deal, Boeing would take over Hughes’ vast El Segundo facility with about 7,600 workers and two smaller units. Hughes Electron Dynamics in Torrance employs about 700 and makes traveling wave tubes used aboard satellites. Spectrolab in Sylmar employs about 400 in the production of solar panels for satellites.

Hughes also will become among Boeing’s largest customers. Of the at least 36 satellites on back order, 10 are for Hughes’ PanAmSat, DirecTV and Spaceway broadband services, officials said. It is unclear whether Hughes would continue to buy satellites exclusively from Boeing, though the deal includes provisions for an unspecified number of orders from Boeing.

After the announcement, Hughes Electronics’ tracking stock--which reflects the firm’s performance but doesn’t provide ownership to investors--jumped $3.69 a share to $110.50, while Boeing’s stock slipped 69 cents, to $42.38, both on the New York Stock Exchange.