GM Deal to Create New Pay TV Giant

The board of General Motors Corp. agreed Sunday night to create the nation’s largest subscription television service by selling its Hughes Electronics subsidiary, the owner of DirecTV, to rival satellite provider EchoStar Communications Corp. for nearly $26 billion in stock and cash, according to people close to the negotiations.

The proposed merger would catapult EchoStar ahead of the nation’s leading cable company, AT&T; Corp. EchoStar, which has 6.4 million customers, would grow to 16.7 million with the addition of DirecTV’s 10.3 million subscribers.

The deal would be a major setback for Rupert Murdoch’s News Corp., which had a competing bid for Hughes but withdrew late Saturday. Murdoch viewed DirecTV as a key piece to completing his satellite empire, which spans most of the globe except the U.S. and China.

The EchoStar proposal, however, would face huge regulatory hurdles. Together, DirecTV and EchoStar’s Dish Network control more than 90% of the satellite market. The deal follows three years of consolidation within the satellite industry in which DirecTV bought two competitors--United States Broadcasting Co. and PrimeStar--and EchoStar purchased the assets of a now-defunct joint venture with Murdoch called ASkyB.

More than a dozen high-ranking members of Congress have expressed concerns about a potential merger of the nation’s two dominant satellite companies. Consumers would have two choices rather than three and some households in areas not wired for cable would have only one subscription television alternative.

Yet in a statement announcing the deal, EchoStar founder and Chairman Charles Ergen said that consumers would benefit from an accelerated introduction of such services as high-speed Internet service via satellite.

In the joint announcement from EchoStar, GM and Hughes, the companies said customers would incur no additional expenses as a result of the deal. Analysts say EchoStar will have to swap out DirecTV equipment, at a cost of billions of dollars, to unify technology across the company.

But the merger also could result in job losses at Hughes Electronics Corp., which employs 3,300 people worldwide and 1,200 at its headquarters in El Segundo. EchoStar, with 10,000 employees, has promised $58 billion in cost savings and additional revenue as a result of the combination.

The new company will employ 14,000 people and retain the EchoStar corporate name, use DirecTV as the product brand, and maintain its base in Littleton, Colo., EchoStar’s home.

Ergen, who will be chairman and chief executive of the combined operation, runs a lean and frugal operation. He flies coach class himself and requires executives to share rooms when they travel.

Ergen and his wife, Candy, started EchoStar with a friend in 1980 as a distributor of large “C-band” satellite dishes. The company began selling pizza-sized dishes in 1996--two years after DirecTV pioneered the business. EchoStar has been a fierce competitor since, forcing consumer prices lower by being the first to offer equipment for less than $200 and targeting cable systems with high complaint rates with aggressive telemarketing campaigns.

EchoStar’s victory is a surprise outcome to GM’s year-long attempt to sell its 30% controlling stake in Hughes. Ergen has been a dark horse since he emerged in August with an unsolicited bid for the subsidiary.

In addition to the regulatory risks of his proposal, Ergen has had trouble financing his bid in today’s jittery equity market. He was able to secure only half the $5.5 billion in cash he needs to satisfy GM’s demands. As a result, Ergen put up the $2.75-billion difference himself, using his EchoStar stock.

EchoStar’s triumph is a bitter disappointment for News Corp., which after a year of negotiations was considered the front-runner going into the weekend GM board meeting. News Corp. even sold one of the nation’s leading cable channels, Fox Family, to Walt Disney Co. for $2.9 billion in cash last week to help raise the money to pay for the acquisition.

After an eight-hour meeting at GM’s New York offices Saturday, the board adjourned to give Ergen more time to secure his financing. The board reconvened Sunday night, and voted, after an hourlong meeting, unanimously in favor of the EchoStar proposal.

It is unclear whether News Corp. could have prevailed had it not pulled its bid. But sources close to News Corp. say GM went to great lengths to accommodate Ergen, perhaps because of a preference for the EchoStar deal, which has been a clear favorite of investors because of its higher premium, impressive synergies, and Ergen’s reputation as a take-no-prisoners operator.

Under the deal, GM would spin off Hughes into an independent company, which would then be merged with EchoStar. Hughes would be the surviving entity, although it would be renamed as EchoStar Communications Corp. Hughes shareholders would own 53% of the new company, while EchoStar shareholders would own about 36%. GM would retain about 11% ownership. Hughes now trades as a tracking stock of the nation’s largest auto company.

Under the proposed terms of the deal, EchoStar would give Hughes shareholders 0.73 EchoStar share for each of their Hughes shares. Based on EchoStar’s closing stock price Friday of $25.26, Hughes shares would be valued at $18.44 apiece. That is a 20% premium above Friday’s closing price of $15.35. Hughes shares trade as a tracking stock to GM’s.

Echostar also will purchase PanAmSat, the satellite launching service that is 80% owned by Hughes.

For GM, the sale would mark its exit from a series of nonautomotive investments made in the 1980s. While Hughes has been a high-growth investment, Wall Street has been pressuring GM to sell the noncore asset and focus on its troubled auto business. The sale gives GM liquidity to help ride out an economic downturn that has already led to a downgrading of its credit rating.

Sources say EchoStar has agreed to pay GM a fee of $500 million if the transaction is not completed. One concern for GM has been a regulatory review that could take up to a year and end in rejection of the deal. The deal would have to be approved by the Federal Communications Commission and the Justice Department.

Sources close to the GM board say they are betting on the more permissive stance toward consolidation under the Bush administration.

GM executives said Sunday night that antitrust regulators could look favorably on strengthening the satellite industry’s ability to compete against cable, particularly if AT&T; consummates merger negotiations that are underway to sell its broadband cable business to Comcast Corp. or Cox Communications. An acquisition would give Comcast more than 22 million subscribers nationwide.

A combined EchoStar and DirecTV would serve 17% of the nation’s pay-television households. By comparison, AT&T; now reaches about 17% and would rise to 25% by combining with Comcast.

What’s more, they say, merging the satellite capacity of EchoStar and DirecTV would allow the companies to eliminate redundancies in their channel lineups and to carry dozens of additional local broadcast networks nationwide. New rules effective in January require satellite providers to carry all local broadcast channels in a given market rather than allow them to cherry-pick the most popular stations, as they do today. To accommodate the rules, the two providers likely would have devoted the limited space on their satellites for providing local channels in only the nation’s largest cities.

Hughes sources say Ergen began getting traction in talks with GM management after hiring as his advisor David Boies, who represented the U.S. government in its antitrust case against Microsoft. A transition team comprised of Hughes Chief Jack A. Shaw, DirecTV Chairman Eddy Hartenstein, Ergen and EchoStar President Michael Dugan will identify the most qualified people for jobs at the new company.