News Corp., Hughes to Merge Pay TV Units

News Corp. and Hughes Electronics Corp. have tentatively agreed on the broad outline of a transaction to combine their satellite operations and create the world’s largest pay television provider, according to sources close to the negotiations.

The merged entity, valued at $70 billion, would combine Hughes’ DirecTV, the largest satellite television provider in the United States, and News Corp.’s BSkyB and StarTV services, which dominate Britain and Asia.

The complicated transaction would also include cash investments by Microsoft Corp. and cable operator Liberty Media Corp. Under terms of the deal, which are still being worked out, Microsoft would invest $4 billion to $5 billion and Liberty Media an additional $1 billion.

The combination still faces significant hurdles, including questions about timing, control and valuation of assets. The deal would also require approval by the boards of News Corp., Hughes and its parent company, General Motors Corp.

But sources close to the negotiations, which have gone on for months, said Tuesday that the final terms probably would be worked out within the next two weeks.

Spokespersons for GM, Hughes, News Corp., Microsoft and Liberty either declined to comment or could not be reached.

Under a framework proposed Tuesday at the regularly scheduled GM board of directors meeting, the auto maker would spin off Hughes, which now trades publicly as a so-called tracking stock. A tracking stock is an arcane vehicle in which shareholders have no rights to the underlying assets of a company but can participate in their financial performance.

Once Hughes is independent of GM it would acquire News Corp.’s Sky Global Networks in exchange for Hughes stock. Sky Global includes News Corp’s 30% stake in BSkyB, its 100% stake in StarTV and a 44% stake in Gemstar, which produces electronic television navigational guides.

DirecTV is the largest asset of Hughes, accounting for more than 80% of the company’s value.

The resulting entity, called DirecTV-Sky Global, would be roughly 35% owned by News Corp. and about 65% by existing Hughes shareholders. News Corp. is expected to have operational control of the company. Microsoft and Liberty would have small equity holdings in the combined company.

GM currently controls all of the voting stock of Hughes but holds only about 30% of its publicly traded shares. GM is said to want cash for most of its holdings in Hughes, valued at about $13 billion. To raise some of that cash, Hughes would sell its PanAmSat subsidiary, which operates satellite transponders. That company is valued at about $7 billion.

It is unclear just when, how and to what extent GM would be bought out of the combined enterprise.

The latest structure would, however, overcome the need for a public offering of Sky Global, which had been planned for the fall but was pulled by News Corp. Chairman Rupert Murdoch when the stock market plunged. Murdoch had planned to use the proceeds from the offering of Sky Global to help buy DirecTV from GM.

News Corp., already heavily leveraged after a series of major transactions, including Chris Craft Industries, has struggled to meet GM’s demands for cash. The new structure would relieve some of the pressure.

Microsoft’s interest in the transaction is said to be based on its desire to control the software in the television set-top boxes needed to receive satellite and cable programming. Liberty Media, controlled by cable mogul John Malone, had committed $500 million to the Sky Global enterprise and is now expected to double that investment.

Hughes has been holding discussions since September with several potential suitors, including Comcast Corp. and America Online, now AOL Time Warner. But News Corp. has always been the front-runner. Murdoch needs DirecTV to fill the biggest hole in his worldwide satellite strategy.

GM began exploring a sale after corporate raider Carl Icahn threatened to accumulate shares in the auto maker. Even though Icahn has since retreated, the auto maker is still considering the deal.

Sources said the GM board did not vote at Tuesday’s meeting but was briefed on the proposal.