EchoStar’s Hughes Bid Prompts Skepticism

EchoStar Communications Corp.’s unsolicited offer for Hughes Electronics Corp. fails to meet key criteria set forth by parent company General Motors Corp. and faces potentially onerous regulatory risks--leading some analysts and industry insiders to largely dismiss the $30-billion takeover proposal.

In active trading Monday, EchoStar shares were driven lower, while Hughes shares increased--but short of the price mark set by the proposal. That led many to conclude that EchoStar’s bid is not taken seriously by the investment community.

Analysts said News Corp., which has been negotiating with GM to take over Hughes for nearly a year, remains at the forefront of merger talks.

Yet Wall Street investors and analysts said that EchoStar’s Sunday bid could complicate prolonged merger talks that already have dragged down Hughes’ performance and even force News Corp. to accelerate its transaction.

EchoStar proposed merging its No. 2-ranked satellite television operation with that of Hughes, which owns industry leader DirecTV. EchoStar would control the resulting company, which would reach more than 90% of all satellite households.

“EchoStar’s offer does give GM/Hughes more leverage to extract concessions from News Corp. in their ongoing merger negotiations, which is good news for GM/Hughes shareholders,” according to a report Monday by Blair Levin, an analyst at Legg Mason. But he wrote that an EchoStar-Hughes combination would face greater regulatory hurdles than a News Corp. transaction, “justifying not only a higher premium, but also some form of indemnification if the deal is blocked.”

EchoStar’s all-stock offer gave Hughes shareholders a 15% premium over Friday’s closing price. But that premium narrowed to 8% Monday, cutting about $600 million in value from the deal, as investors punished EchoStar shares.

Shares of the nation’s second-ranked satellite TV provider fell $1.65 to close at $28.79, down 5.4%. Shares of Hughes, which owns satellite leader DirecTV, rose just 68 cents to close at $20.04. That is below the $22.83 a share that EchoStar’s Sunday bid placed on the Hughes shares.

American depositary receipts of News Corp., which proposes merging DirecTV with its own satellite assets, fell 80 cents to $37.45 on the New York Stock Exchange.

Earlier this summer, Wall Street sent EchoStar a signal of disapproval for a merger with Hughes. After EchoStar announced in July that it would not pursue a deal with Hughes, Wall Street rewarded the company by pushing up its stock price 15%. That was after EchoStar raised $1 billion in debt preparing to build a war chest to go after Hughes. Investors have been concerned that meeting GM’s demands that $5 billion of the purchase price be in cash would only add to the company’s already substantial debt levels.

Underscoring the shortcomings of EchoStar’s offer, Chairman and Chief Executive Charles W. Ergen said Monday that he would consider adding some cash to the deal.

EchoStar has offered 0.75 share for each Hughes share, with no cash component. News Corp.’s offer, which had been slated to be announced late this month, includes more than $5 billion in cash.

“If GM said to us, ‘We like this deal, but we need to see some cash,’ we would certainly be willing to revisit that issue with them,” Ergen told analysts in a conference call Monday.

EchoStar earlier in the year offered a cash component of $5.5 billion to GM and Hughes that was rejected, Ergen said.

Sources say GM rejected the bid because of concerns that antitrust regulators would not approve a merger of the No. 1 and No. 2 satellite companies.

The combined firm would be slightly larger than the U.S.’ largest cable operator, AT&T; Broadband, which has 16 million subscribers.

“Cable rates are going up two or three times the rate of inflation,” Ergen told reporters in a conference call. “The only way that’s going to stop is to have a strong satellite operator to compete with those folks.”

The GM board is expected today to review EchoStar’s proposal, while getting an update on the News Corp. transaction.

Hughes sources say that News Corp. still is wrapping up its due diligence on Hughes operations other than DirecTV. While terms of the deal have been worked out for months, one sticking point for News Corp. was several billion dollars in potential liabilities from contract disputes with Boeing and Raytheon.

Sources close to the deal say those issues have been resolved, with both companies agreeing to split the cost of covering those liabilities.