Hughes-News Corp. Merger: A Marriage of Many Partners

The possible marriage of DirecTV and Sky Global Networks is stacking up to be a complex affair, with a wedding party that includes a guest from just about every walk of media life and then some.

Joining the two satellite television companies at the altar are a leading auto maker, a defense contractor-turned satellite service provider, an international entertainment titan, a cable and technology giant and the world’s largest software company.

It’s one of the most eclectic amalgamations of companies to come together in any mega-merger. That is both a reflection of the massive size of the transaction and the convergent nature of the media business today.

The deal, which could be signed before the end of the month if no snags develop, is indeed convoluted, but gives each party involved in the transaction a strategic or financial benefit they are seeking.

* News Corp., owner of Sky Global, completes it’s worldwide satellite network and gets an outlet for its film, television and sports programming.

* Hughes Electronics Corp., owner of DirecTV, expands its reach outside of the U.S. and gets partnered up to a content provider.

* Microsoft Corp., which is expected to put up as much as $5 billion, wants to be the supplier of software inside the set-top boxes to decode the satellite transmissions in millions of households.

* General Motors Corp., which owns controlling interest in Hughes, gets billions in cash to see it through a possible recession.

* Liberty Media Corp, which is expected to invest up to $1 billion in the deal, gets a global pipeline to consumers for its cable television channels.

At the heart of the deal is a merger of News Corp.’s Sky assets and Hughes’ DirecTV operations to create the largest electronic conduit to consumers in the world, reaching potentially 200 million households globally.

The centerpiece of the new company, which would have a value of more than $70 billion, would be DirecTV, the primary asset within Hughes and the nation’s leading satellite TV service.

Under the deal, which has been in the works for months, News Corp. would gain control of DirecTV and patch up a gaping hole in its worldwide strategy. Chairman Rupert Murdoch is eager to reach every corner of the Earth by satellite, allowing him to feed consumers a steady diet of programming including his own.

News Corp., which would own 35% of the new company and control operations as the largest shareholder, owns newspapers, cable channels, the Fox television network, the Dodgers and the 20th Century Fox studio, which produces TV shows such as “Ally McBeal” and “The Simpsons” and movies such as “Cast Away.”

Tom Eagan, media analyst at brokerage firm UBS Warburg, said that News Corp. could radically alter the business models of the movie industry by airing films over DirecTV even before they appear on the shelves at video stores. While the movie studios have been reluctant to do anything to cannibalize their home video income--the industry’s biggest source of revenue--Eagan said Murdoch might be able to offset any declines through increases in DirecTV subscriptions.

At a time when cable operators such as AOL Time Warner are rolling out video-on-demand movie services, DirecTV could use such a strategy to gain the upper hand in its battle to become the nation’s largest pay television service.

A merger of DirecTV and Sky would also allow the combination of their operations in Latin America that now compete head-to-head. That could lead to combined savings of $1 billion.

What is more, having worldwide satellite clout would give Murdoch an upper hand in negotiating deals with programmers and providers of other telecommunications service. Right now, News Corp. controls the dominant satellite services in Britain and Asia, and is building its presence in Italy and Mexico.

GM is selling the satellite concern to shore up its balance sheet during an economic slowdown that is already hurting car sales. GM controls Hughes’ voting shares, and owns roughly 30% of all outstanding shares, worth roughly $10 billion at current market values.

“GM wants to simplify its capital structure and harvest its investment in Hughes,” Eagan said. “News Corp. and Liberty want a pipeline for their content. To continue its assault against cable, Hughes needs to provide more content.”

One reason Microsoft is so eager to be at the table is to gain access for its software to set-top boxes needed to receive cable and satellite signals. Microsoft, intent on dominating the living room in the same way it now controls the office desktop, has spent billions of dollars buying its way into the set-top boxes. It invested $1 billion in Comcast, although that has not resulted in increased use of the Microsoft operating system in the advanced set-tops being deployed by the cable operator. The software giant invested $5 billion in AT&T;, though the telecommunications giant has yet to put any of the boxes developed with Microsoft into customers homes.

At one point, Microsoft had committed $8 billion to the News Corp.-Hughes deal, although is now investing about half that.

For its part, Liberty Media has already agreed to transactions with Murdoch that would make it News Corp.’s largest shareholder outside the founding family. John Malone, who controls Liberty Media, has tried without success several times to partner with his friend Murdoch in the satellite business.

Malone, however, is likely to be a silent partner in this deal because he is also a large shareholder in AT&T;, a direct competitor to DirecTV.