Hughes-Pegasus Mediation Is Ended
Pegasus Communications Corp. shares fell by almost half after DirecTV owner Hughes Electronics Corp. said it ended mediation over the companies’ marketing relationship and would take its $60-million claim to trial.
The shares dropped after Hughes Chief Executive Chase Carey said the company would not end the legal battle by purchasing Pegasus -- which distributes DirecTV satellite service in some rural areas -- at an inflated price.
News Corp. acquired control of DirecTV in December.
Pegasus, whose distribution area accounts for less than 8% of all U.S. households, will lose the right to sell DirecTV services by June 2008 if it does not accept the settlement that Hughes reached last month with the National Rural Telecommunications Cooperative over a similar dispute, Carey said.
The rights will last until 2011 if Pegasus accepts the agreement, he said.
DirecTV in 1999 sued the NRTC -- a rural group that resells satellite television services -- seeking to cut short its exclusive marketing agreement. Some investors had suggested that Hughes might buy Pegasus to take back rights to market to NRTC customers.
The settlement would help the No. 1 U.S. satellite broadcaster gain control of its relationships with rural customers. As part of the settlement, the NRTC had agreed to hand subscribers back to DirecTV’s control in 2011. Pegasus is the NRTC’s largest member.
“With every day that passes, both Pegasus’ significance to DirecTV and its value as a stand-alone enterprise diminish,” Carey said.
Pegasus shares had rocketed from $14 in mid-October to $50 by Jan. 21, as some investors bet that El Segundo-based Hughes would become impatient and pay a premium for the company, said Sanders Morris Harris analyst Steve Mather.
Pegasus stock lost $1.08 to $41.65 in regular Nasdaq trading Thursday, then plunged to $26 in after-hours trading, after Hughes’ announcement.
“Despite prior assertions that [Hughes] wouldn’t overpay, we understand some on the Street still thought it was a significant possibility,” said Mather, who rates Hughes shares a “strong buy” and doesn’t own them.
A message left at Bala Cynwyd, Pa.-based Pegasus wasn’t immediately returned.
Trial is set for March in U.S. District Court in Los Angeles.
