Hughes Ousts Exec, Clears Way for Sale

In a stunning twist in the takeover saga of Hughes Electronics, the board of the satellite TV provider abruptly ousted Chairman Michael T. Smith late Thursday night, removing a major obstacle to News Corp.’s proposed takeover of the El Segundo concern.

Smith’s departure caps growing friction between Hughes and its parent company, General Motors Corp. Although GM ordered Hughes management earlier this month to concentrate on completing the News Corp. deal, sources say that Smith continued to rally support behind the scenes for a rival bid by EchoStar Communications Corp.--the only satellite television competitor to Hughes’ DirecTV service.

Harry J. Pearce, the vice chairman of GM, who was expected to retire later this year, was named Friday as the new chairman of Hughes. Jack A. Shaw, a senior executive vice president of Hughes in charge of all non-DirecTV assets, assumes Smith’s other title, chief executive.

Smith was unavailable for comment.

Sources said GM’s management worried that an EchoStar bid would further delay a deal with News Corp., which after dragging on for months is now in its final stages. These sources say GM has concluded that News Corp. is the most viable bidder, with the best chances of clearing Washington regulatory hurdles and meeting the board’s demands for $6 billion of the purchase price in cash.

Half the size of DirecTV, EchoStar lacks the financial muscle to acquire GM’s 32% controlling stake in Hughes, which is valued at nearly $13 billion. But the company on Thursday sold $1 billion in debt in an effort to build a war chest for an anticipated bid.

Even if EchoStar were to find a financial backer to aid in a bid for Hughes, a merger of the nation’s only two satellite companies would raise antitrust concerns, creating a pay television provider with more subscribers than the country’s largest cable operator, AT&T; Corp.

In a conference call announcing the management changes on Friday, Pearce refused to elaborate on the status of the News Corp. negotiations or whether EchoStar is in discussions with the auto maker. He did not say whether he would move to the Los Angeles area, although most sources believe that both he and Shaw will oversee the sale of Hughes for GM as their last acts before retiring.

Pearce would not discuss the timing or reasons behind Smith’s departure. His leaving was characterized as a retirement, though he was given a consulting contract.

“The changes were the result of intense and complex discussions between Hughes and GM boards and Mike,” said Pearce, who is retiring from GM and its board to assume the top job at Hughes. “Mike Smith elected to retire. It was his decision and the board agreed.”

Pearce praised Smith for transforming Hughes from a manufacturing and defense company to a commercial services enterprise. Under Smith’s watch, Hughes has shed satellite manufacturing and defense operations, leaving only three key assets: DirecTV, the nation’s largest satellite TV provider; satellite operator PanAmSat; and Hughes Network Systems, which designs networking systems.

DirecTV accounts for about 80% of the value of Hughes, which trades publicly as a “tracking stock” of GM--meaning that shareholders participate in its financial performance without owning the assets outright.

In addition to being on the Hughes board, Pearce was chairman until 1992, when C. Michael Armstrong, now the chairman of AT&T;, took the job. Smith, who joined Hughes in 1985 after a 20-year history with GM, succeeded Armstrong in 1997 as chairman and CEO.

Smith’s ascent has been a source of controversy within GM and Hughes and on Wall Street. Smith is the younger brother of GM Chairman John F. Smith Jr. John Smith for years was criticized on Wall Street for refusing to spin off Hughes, especially as DirecTV’s growth exploded, making Hughes’ stock market value greater than the auto maker’s.

Because tracking stocks typically trade at a significant discount to their intrinsic value, Hughes shareholders contended that a spinoff would unlock value for GM. Smith’s refusal set off speculation that he was protecting his brother’s job and using the subsidiary’s growth to mask GM’s own dismal stock performance. Management changes at the top of GM last fall and a threat by corporate raider Carl Icahn propelled the company to pursue a sale of Hughes.

After GM and News Corp. reached a handshake agreement to merge their satellite assets in early February, terms of the deal leaked, causing Hughes shareholders to bail out of the stock in protest of the disappointing premium they were to receive.

Michael Smith aligned himself with the disgruntled shareholders, lobbying GM to consider an alternative plan under which he would borrow the money to pay off the auto maker and spin off Hughes into an independent, albeit debt-laden, company. With Hughes shares under pressure, GM gave Smith two months--until the end of April--to flesh out his alternative plan.

News Corp. saw Smith’s attempts as a tactic to save his job. News Corp. Chairman Rupert Murdoch planned to eliminate Smith’s job, retain DirecTV chief Eddy Hartenstein and sell off Hughes Network Systems and PanAmSat.

Smith’s credibility began to sink in March, when despite strict orders from Pearce not to discuss the News Corp. deal in public, Smith told Morgan Stanley investors at a dinner in New York in March that Hughes was not going to accept Murdoch’s terms.

The outburst sent GM scrambling, forcing the company to issue a securities filing and a media statement assuring investors that it was continuing to explore all options with regards to Hughes. Sources say Pearce was enraged and embarrassed.

With tensions building between GM and Hughes, and between the two Smiths, the GM board asked the brothers to recuse themselves from day-to-day negotiations with News Corp. Smith dug himself in deeper when he failed to deliver an alternative plan by the deadline, prompting GM to issue a statement early this month indicating for the first time that it would pursue the News Corp. deal.