News Corp. Reaches Deal for DirecTV

Capping a decade-long quest to dominate satellite TV service in the U.S., News Corp. agreed Wednesday to pay $6.6 billion in stock and cash to grab virtual control of DirecTV’s parent company, giving the cable industry a dreaded new adversary.

The transaction would fill a void in News Corp.’s worldwide satellite empire, which reaches China, Asia, Italy, Britain and Latin America. General Motors Corp., which controls DirecTV parent Hughes Electronics Corp., would get the cash it needs to offset a massive deficit in its pension fund.

Wednesday’s pact, to hand News Corp. 34% of El Segundo-based Hughes, is the latest in a series of media consolidations that have concentrated power in a handful of global companies. They include AOL Time Warner Inc., Viacom Inc., Walt Disney Co., News Corp. and Comcast Corp.

For News Corp. Chairman Rupert Murdoch, the satellite deal represents a personal triumph. He has been looking for 10 years to find a way into the U.S. satellite TV market and has been trying to wrest control of DirecTV since early 2000. He once considered making a run at GM itself to accomplish his goal.

In the U.S., DirecTV would become the first satellite TV provider backed by a major Hollywood studio, giving Murdoch a nationwide pipeline for television programs produced by his Fox entertainment factory.

“In a landscape of increasing choices, this ensures that our content continues to reach consumers,” Murdoch said during a conference call with reporters. He said News Corp.’s 15 years of satellite expertise would “reinvigorate” DirecTV and “break cable’s dominant hold on TV viewership.”

Murdoch’s triumph -- making him the nation’s second-largest pay TV provider, after Comcast -- could well spark further consolidation as other media giants move to checkmate News Corp.’s leverage. For instance, Comcast might buy a major entertainment company such as Disney, according to analysts. DirecTV’s satellite rival, EchoStar Communications, which tried to merge with Hughes but was blocked by federal regulators on antitrust grounds, could be forced to sell to an entertainment company or a telephone giant with aspirations to bundle TV service with telecommunications offerings.

Murdoch’s ownership also could result in more downsizing at Hughes. When GM bought the company in 1985, Hughes employed 105,000 people. The number now stands at 12,000 because of the sale of its defense and automotive businesses, along with cost cutting at DirecTV in the last year as subscriber growth slowed. News Corp. would give no specifics about the possibility of more cuts, but said it would look for cost savings.

News Corp. did say it planned to expand rather than sell Hughes’ other two businesses -- Hughes Network Systems, a satellite services provider, and its 81% stake in satellite operator PanAmSat.

Murdoch would become chairman of Hughes. He said he would appoint Chase Carey, the former chief operating officer of News Corp., as chief executive of Hughes, to replace Jack Shaw, who is retiring. Carey said there were no plans to change Hughes’ current management; DirecTV Chairman Eddy Hartenstein would take on the additional role of vice chairman.

The sale would mark GM’s exit from the satellite television business it pioneered in 1995 by funding Hughes’ launch of DirecTV, which modernized the bulky backyard dish by introducing miniature rooftop receivers the size of pizza pies. GM put Hughes up for sale in the fall of 2000 because it needed cash to pay pension deficits that topped $25 billion last year as the fund’s portfolio sank in value.

“Hughes will be better served under a different ownership structure,” GM Chief Executive Richard Wagoner said during Wednesday’s conference call, referring to Hughes’ transformation from a defense and technology provider to a media company.

News Corp. said it expected to complete the transaction by the end of the year after earning regulatory clearance and a favorable tax ruling from Washington and shareholder approval.

Regulators aren’t expected to block the deal, although some cable operators and television station owners are likely to voice opposition, given News Corp.’s increased leverage and Murdoch’s history of changing the economics of the businesses he enters.

“This will be a huge war,” said Rocco B. Commisso, chairman of MediaCom, the nation’s eighth-largest cable operator. “There are all kinds of things that will have to be settled before regulators approve the deal.”

Under the deal announced Wednesday, GM would split Hughes off to public shareholders; it now trades as a “tracking” stock. Tracking stocks give shareholders a chance to participate in the financial performance of a company without controlling the underlying assets. In the case of Hughes, GM controls the company, retaining a 19.9% equity interest, while shareholders own the rest.

The auto giant would sell that stake in Hughes to News Corp. for $3.8 billion, of which $3.1 billion would be in cash and $700 million in News Corp. preferred shares. In addition, GM would get a special payment of $275 million from News Corp. for agreeing to convert the Hughes tracking stock into fully independent shares.

The special payment means News Corp. is paying GM about $1 a share more than public shareholders.

News Corp. would buy 14.1% of Hughes from current public shareholders, who would get cash or preferred shares at News Corp.’s discretion. News Corp. is paying $14 a share for the 34% of Hughes stock, valuing the satellite company, based on Wednesday’s closing price, at about $19.5 billion, representing a 22% premium. News Corp. would transfer those shares to Fox Entertainment Group, the U.S. entertainment arm that it controls with more than 80% of the stock.

Hughes shares fell 2 cents to $11.48. GM declined 25 cents to $34.48. News Corp.’s U.S.-traded shares were down 66 cents to $27.22. All trade on the New York Stock Exchange.

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Murdoch’s empire

A sampling of News Corp.’s holdings:

Televison: Fox Broadcasting; 34 U.S. TV stations; partial ownership of subscription television services in Europe, Asia, Latin America, Australia and New Zealand that reach more than 300 million viewers; cable network programming, including the Fox channels and National Geographic Channel (partial ownership)

Filmed entertainment: 20th Century Fox Film, Fox Television Studios, Blue Sky Studios

Newspapers: New York Post in the U.S.; the Times and the Sun in Britain; more than 100 papers in Australia; other publications in New Zealand, Fiji and Papua New Guinea

Books: HarperCollins Publishers

Magazines: TV Guide and the Weekly Standard, among others

Sports: Los Angeles Dodgers

Revenue by business segment

Television -- 28.1%

Film operations -- 26.6

Newspapers -- 15.9

Cable programming -- 12.3

Book publishing -- 7.1

Magazines -- 5.7

Other -- 4.3

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Source: News Corp.