SBC Drops Bid for DirecTV, Lifting News Corp.’s Hopes, Sources Say

SBC Communications Inc. has backed out of the race for DirecTV parent Hughes Electronics Corp., probably leaving News Corp. as the solitary bidder for the nation’s satellite TV leader, sources close to the talks said Tuesday.

With SBC out of the picture, News Corp. could end up paying less of a premium for the El Segundo-based satellite TV provider, which is owned by General Motors Corp.

Since GM first put Hughes up for sale in late 2001, the value of the subsidiary has fallen by nearly three-fourths to about $10 billion as the auction dragged on, the economy faltered, and DirecTV rival EchoStar Communications Corp. gained market share.

SBC, the nation’s second-largest provider of phone service, had considered buying Hughes to better compete against the cable industry. Hughes would have allowed SBC to provide its customers the same bundle of services -- phone, Internet access and television -- that cable operators are offering now that they have upgraded their systems with digital technologies.

SBC bowed out of the auction after an SBC board meeting Friday at which a Hughes bid was discussed, according to people close to the situation. It was not immediately clear whether the board voted on the bid.

Analysts said SBC had trouble selling the strategy to Wall Street. “The big investors didn’t buy it,” said Blair Levin, an analyst at Legg Mason. “It looks like News Corp. gets DirecTV without a competitive bid.”

Fears that it would be a financial strain for SBC to buy Hughes have driven down SBC’s stock by 14% since early February, when the phone giant first emerged as a contender. Shares bounced back Tuesday, jumping $1.32 to close at $21.38 on the New York Stock Exchange. Hughes shares fell 18 cents to $11.02. News Corp.’s U.S.-traded shares rose 60 cents to $26.50.

SBC would not comment on the potential DirecTV bid, which GM had expected to receive today. Hughes and News Corp. also would not comment.

News Corp. had been scrambling to size up SBC’s interest before submitting its bid. News Corp.’s bid is expected in the next several days. Even with SBC out of the game, analysts questioned whether News Corp. Chairman Rupert Murdoch would risk losing the deal by submitting a low-ball bid.

News Corp. lost Hughes when the first round of bidding took place in late 2001, after EchoStar surfaced in the eleventh hour with a superior offer.

Federal regulators, however, rejected the EchoStar-DirecTV deal last year on antitrust grounds. That gave Murdoch a second shot at DirecTV, which would fill a U.S. gap in News Corp.’s global satellite empire.

One wildcard is Cablevision Systems Corp., which is interested in making its own bid for DirecTV. But most analysts dismiss its chances because it lacks the financial wherewithal and its ownership of cable systems that compete against satellite TV would make regulatory approval of a deal uncertain.

Last week, Liberty Media Corp. also stepped out of the running for Hughes by agreeing to invest $500 million in News Corp. to help finance its bid.

News Corp. is expected to offer to buy about 35% of Hughes, sources said. That would give Murdoch a big enough stake to control Hughes.

Under the expected proposal, News Corp. would purchase GM’s 20% stake and make an offer to other shareholders for an additional 15%.