EchoStar-DirecTV Deal Blocked by Regulators

The Federal Communications Commission blocked EchoStar Communications Corp.’s proposed $16-billion buyout of satellite television rival DirecTV on Thursday, declaring the harm to consumers would be “staggering.”

The FCC’s four commissioners brushed aside EchoStar’s last-minute offer to amend the merger and unanimously ruled that a combination of the nation’s No. 1 and No. 2 satellite television companies would stifle competition and innovation, lead to higher prices for consumers and hurt the quality of service.

“The combination of EchoStar and DirecTV would have us replace a vibrant competitive market with a regulated monopoly,” FCC Chairman Michael K. Powell said at a news conference in Washington. “This flies in the face of three decades of communications policy.”

The decision marks the first time since 1967 that the FCC has voted to halt a major merger. Analysts said it sets the stage for a potentially massive legal battle, either between the government and the two companies, or between the two companies themselves, fighting over who is to blame for the merger’s collapse.

The FCC vote also is the most significant ruling since Powell and his fellow commissioners were appointed by President Bush last year. The vote surprised EchoStar and its aggressive chairman, Charlie Ergen, who may have underestimated the opposition to the merger and the skepticism and resentment he faced from government regulators, analysts said.

The FCC left the door open for EchoStar and DirecTV to modify the deal within the next 30 days. But commission officials said it was unlikely that any changes--including the divestiture of some satellite slots to create a new national satellite provider--would be enough to address their concerns.

The proposed merger of EchoStar and DirecTV was announced with great fanfare last October and would have created the nation’s largest pay-television company, with more than 18 million customers.

EchoStar, based in Littleton, Colo., owns the Dish Network. Hughes Electronics Corp., based in El Segundo, owns DirecTV, and is a unit of General Motors Corp.

With prospects for government approval now dim, GM will be eager to move on and start searching for a new buyer for Hughes, analysts said.

The most likely buyer is Rupert Murdoch’s News Corp., which lobbied heavily to block the deal and lost a bidding war for DirecTV a year ago. Managers at DirecTV also have talked about proposing a management buyout, sources said, though Hughes executives deny that any formal plans are underway.

Nevertheless, EchoStar and Hughes vowed Thursday to press ahead with a revamped merger proposal, which the companies plan to present this month to the FCC and the Justice Department, which also is leaning against approving the deal.

“We still want the merger to go through,” said Richard Dore, a spokesman for Hughes.

The two satellite TV rivals have contended that a combined company would enable them to better compete against local cable TV providers by offering more local channels than they currently can, and rolling out additional services such as high-speed Internet access.

But the EchoStar-DirecTV proposal drew strong opposition from broadcasters and several rural communities, which feared the combined company would have a pay-TV monopoly in markets that can’t receive cable.

Unless the FCC agrees to suspend its decision over the next 30 days, the agency will refer the merger next to an administrative law judge. EchoStar and DirecTV have the right to ask the judge to review the FCC’s ruling. But it’s an expensive, time-consuming process that is seldom exercised. Most companies opt to drop their merger.

DirecTV Chief Executive Eddy Hartenstein said Wednesday that he did not expect the companies to extend their previously established Jan. 21 deadline for closing the merger, and it’s highly unlikely that an administrative hearing could be completed by then.

The FCC ruling breaks with tradition because historically the agency has delayed merger decisions until after the Justice Department completes its antitrust review. That allowed the FCC to consider the Justice Department’s findings and avoid the embarrassment of approving a merger later rejected by another government agency.

But Powell has hinted for months that he might not wait until the Justice Department announced its decision. Some accused him of political grandstanding, but others said the decision to move independently reflects Powell’s no-nonsense style and confidence that the EchoStar-DirecTV merger would be bad for consumers.

FCC officials also were irritated by EchoStar’s last-minute attempt Monday to revise the deal and Ergen’s sudden request for a public hearing, which insiders viewed as a disingenuous delaying tactic. They note that EchoStar has still not submitted any formal request to modify the deal.

FCC Media Bureau Chief W. Kenneth Ferree said EchoStar’s record was a factor in the review, particularly when the agency considered whether the company could be relied upon to live up to the promises it made in the merger application.

He said the commission rejected EchoStar’s assertion that it does not compete against DirecTV, and concluded that the promised benefits of the merger were either speculative or too modest.

“EchoStar and DirecTV ... compete vigorously, not only with cable but with each other,” Powell said.

Although EchoStar offered to create a national pricing system to ensure that rural customers would not pay exorbitant rates, the commission found that such a scheme would, in effect, replace the free market with government-regulated rates.

Analysts predict that the FCC’s rejection may splinter the fragile partnership of EchoStar and DirecTV, two rivals that have spent the last year trying to put up a united front.

But if the deal falls apart, the companies probably will return to being full-time rivals, leading to a “litigation lollapalooza,” said Blair Levin, a former FCC official and an analyst at Legg Mason in Washington.

“We expect the parties to sue each other for breakup fees, with both sides blaming the other for the deal’s demise,” he said.

If the deal collapses, the merger contract calls for EchoStar to pay Hughes a $600-million termination fee and to purchase Hughes’ stake in satellite operator PanAmSat for $2.7 billion.

Analysts expect Ergen to search for ways to reduce or avoid the breakup fee. But even if the deal fails, EchoStar emerges a winner because it has kept its chief rival tied up for a year, gotten a closer look at DirecTV’s books and prevented a takeover by News Corp., analysts say.

Ergen also is expected to modify the deal to appease regulators. One possibility involves New York-based Cablevision Systems Corp., which is offering to take over some of EchoStar’s satellite slots and create a nationwide service.

Cablevision Chairman Charles F. Dolan said Thursday that he hoped to work with EchoStar to restructure their plan. But regulators remain skeptical that Cablevision has the money or technology to offer a competitive national satellite service.

EchoStar’s shares fell 3 cents Thursday to $16.98 on Nasdaq. Hughes’ shares fell 25 cents to $8.15 on the New York Stock Exchange.