EchoStar Deal Faces Antitrust Hurdles

In more ways than one, time may be running out for the proposed satellite merger between EchoStar Communications Corp. and DirecTV’s parent, Hughes Electronics Corp.

Last week, the Federal Communications Commission restarted its merger countdown clock, vowing to decide by early November whether the deal serves the public’s interest. The agency had stopped its self-imposed clock in March, saying EchoStar failed to provide requested documents.

Meanwhile, the Justice Department has hinted it might make a preliminary decision as early as September.

But prevailing opinion in Washington is that antitrust regulators--even in a Republican administration with a hands-off approach--will be hard-pressed to accept a merger that combines the No. 1 and No. 2 satellite providers and gives the new company a monopoly in many rural markets. Nationwide, the merged entity would control 90% of the satellite television market.

For FCC Chairman Michael K. Powell and the Justice Department’s antitrust chief, Charles James, the deal will be the first major test of how the Bush administration implements its deregulatory agenda in the telecommunications industry.

“This is new terrain for the Bush administration,” said Gene Kimmelman, executive director of Consumers Union in Washington.

The recent corporate accounting scandals have thrown a new wild card in the mix. Under fire for being too closely aligned to business interests, the Bush administration risks a firestorm of criticism if it permits the merger to go through, one lawmaker said.

“Prospects for the merger have become more daunting in the last several months because of the corporate scandals that have arisen,” said Rep. Xavier Becerra (D-Los Angeles), who has come out against the merger because he fears that it would harm rural and Latino TV viewers. “There’s going to be a higher level of scrutiny because of the message this merger sends.”

EchoStar officials say they remain optimistic about closing a deal by the end of the year.

“The merger is on course,” said EchoStar spokesman Marc Lumpkin. “We are confident that [regulators] will approve it.”

The Littleton, Colo.-based company is arguing that the merger would enable it to become a strong competitor against cable companies by offering more local channels in more markets and high-speed Internet access.

But since the deal was announced in October, dozens of members of Congress--particularly in rural states--have urged regulators to block the merger.

And the National Assn. of Broadcasters, the National Rural Telecommunications Cooperative and Rupert Murdoch’s News Corp. are lobbying against it. Murdoch had hoped to buy DirecTV until EchoStar moved in at the last minute.

Doubt on Wall Street

Wall Street appears to be betting against the deal. Shares in Hughes Electronics, a unit of General Motors Corp., are trading well below the price EchoStar is offering to pay. Hughes Electronics shares closed Friday up 27 cents at $9.24 on the New York Stock Exchange, about 20% less than the implied price offered by EchoStar’s proposed stock swap. EchoStar closed Friday up 21 cents at $15.09 on Nasdaq.

“We believe EchoStar has made little headway in its efforts to get approval,” Salomon Smith Barney analyst Armand Musey said in a recent report. “We do not think regulators will find EchoStar’s concessions--mainly the guarantees of national pricing policy and local service for all markets--sufficiently compelling to outweigh the potential negative impacts of lost competition.”

Mergers between the two largest players in the same business are frowned on under standard antitrust theory unless one of the companies is in financial peril.

“It’s way over the line by any antitrust measure,” said Scott Cleland, regulatory analyst and chief executive of Precursor Group in Washington. “If they approved this merger, it would open the floodgates in every other industry.”

Even if regulators accepted the argument that satellite TV providers should be viewed as competitors to cable, the merger would reduce the number of pay-TV players in most U.S. markets from three (EchoStar, DirecTV and the local cable provider) to two.

In most rural markets that don’t offer cable, the choices would drop from two to one.

EchoStar is trying to persuade regulators to make an exception, arguing that the merger would enable it to become a much stronger competitor to cable providers, resulting in lower prices and more services for all pay-TV customers.

For example, EchoStar offers only local channels in 40 of the nation’s 210 markets and does not offer high-speed Internet access. Cable offers both, and thereby has a competitive advantage, Lumpkin said. Without the merger, EchoStar said it does not have enough bandwidth to offer all local channels and Internet service.

Concerns at FCC

Regulators have expressed some skepticism. Powell and FCC media bureau chief W. Kenneth Ferree have said the merger raises “significant” concerns. Ferree said last fall that the merger would “close the door on any future competitor.”

In addition, promises to offer local channels, fixed national pricing and Internet access may be a tough sell at the FCC, which recently chided EchoStar for its history of “disingenuous behavior and lack of candor” in dealings with the agency.

But even if the merger is scrapped, EchoStar and its CEO, Charles Ergen, come out winners. EchoStar got a peek at the books of its main rival, which has been left in limbo since October. With the distractions of a pending merger, DirecTV has had difficulty keeping and attracting good employees and pursuing long-term strategies, analysts said.

Meanwhile, EchoStar has aggressively moved into DirecTV’s turf, offering its dishes in RadioShack Corp. stores and, soon, Wal-Mart Stores Inc. locations.

And Ergen has prevented DirecTV from falling into the hands of News Corp.

“Ergen wins even if the government says no,” Cleland said.

DirecTV spokesman George Jamison denied that the company has been distracted or lost key people.

“And due diligence is a two-way street,” Jamison said. “Everything EchoStar has seen about our business, we’ve seen about theirs.”

Some EchoStar critics suggested that the company realizes that prospects for merger approval are slim and is merely trying to drag out the process to prevent DirecTV from moving on. They point to EchoStar’s delay this spring in providing documents to the FCC.

“Ergen can be quite happy that for at least a year, he didn’t have a competitor and kept DirecTV out of the hands of someone who would operate it as a strong competitor,” said Lloyd Constantine, an attorney at Constantine and Partners in New York, which News Corp. has hired to help it kill the deal.

EchoStar’s Lumpkin denies the company has any incentive to slow down the pace.

“We’ve always said we expected the approval process to last as long as a year,” he said.

It’s unclear whether News Corp. would still want to buy DirecTV if the EchoStar deal collapses.

But the entertainment giant is nevertheless fighting behind the scenes to gin up opposition among religious broadcasters, lobbying state attorneys general and meeting Justice Department officials.

Constantine said several states are preparing to block the merger even if the Justice Department approves it.