DirecTV-Pegasus Battle Continues

DirecTV Group Inc. on Wednesday terminated the exclusive contract that allows Pegasus Communications Corp. to market the satellite service to rural customers and offered to buy the company’s subscribers for as much as $750 million.

The move pushed two Pegasus units to file for bankruptcy protection late Wednesday. Pegasus Satellite Television Inc. and Pegasus Satellite Communications Inc. filed in U.S. Bankruptcy Court in Portland, Maine, under Chapter 11.

Wednesday’s moves are the latest skirmishes in a bruising four-year battle between the two companies over rural distribution rights.

Pegasus, based in Bala Cynwyd, Pa., distributes the satellite service through a contract with the National Rural Telecommunications Cooperative. DirecTV is losing customers in Pegasus’ territory and wants to turn that trend around.

“We have seen the number of subscribers to DirecTV services in territories covered by the NRTC agreement steadily decline -- primarily in Pegasus territories -- in the last few years,” said Steve Cox, executive vice president of El Segundo-based DirecTV. “We believe the termination of the old distribution agreement will allow DirecTV and NRTC to reverse this trend.”

DirecTV, the biggest U.S. satellite-television provider, said the decision to terminate the contract was a mutual decision between it and the cooperative.

Pegasus Chief Executive Mark Pagon said in a statement that DirecTV’s and the cooperative’s effort to end the contract were “unlawful.”

DirecTV offered Pegasus a cash payment of $675 per subscriber for the “orderly transfer” of Pegasus’ more than 1 million DirecTV subscribers by Aug. 31.

Analysts had warned that DirecTV’s decision to terminate the contract could bankrupt Pegasus, which is under pressure to accept an offer worth less than the $1.39 billion in long-term debt it carried at the end of last year.

DirecTV is “playing hardball,” said Bill Jacobs, an analyst with Harris Associates in Chicago. Jacobs said he expected DirecTV to raise its offer for Pegasus’ subscribers.

DirecTV, which is controlled by Rupert Murdoch’s News Corp., offered either a lump sum of $675 for each Pegasus subscriber or $16.67 a month for each through June 2008, according to a filing with the Securities and Exchange Commission.

DirecTV and the cooperative are ending their contracts after settling lawsuits in January over how long the cooperative and its affiliated companies held exclusive rights to offer the satellite-TV service.

Pegasus, which had refused to take part in the settlement, had filed a separate suit against DirecTV. A federal judge in Los Angeles threw out that suit last month.

DirecTV said it offered as much as $400 million to take over service from other companies that resell DirecTV through past agreements with the cooperative. As an alternative, DirecTV said it offered all of the resellers except for Pegasus new contracts to market DirecTV’s service in their territories.

DirecTV is offering prices ranging from $875 to $1,050 for each subscriber involved in the settlement, depending on time remaining on each of the resellers’ contracts, or monthly payments of $16.67.

Trading of Pegasus shares were halted Wednesday on Nasdaq after DirecTV’s announcement. The stock has fallen 45% this year.

Pegasus’ debt was downgraded in April to CCC, eight levels below investment grade, by Standard & Poor’s. The debt-rating firm said it might lower the rating again.

DirecTV shares Wednesday fell 4 cents to $17.46 on the New York Stock Exchange.

About 1.49 million of DirecTV’s 12.6 million subscribers resided in the National Rural Telecommunications Cooperative’s territories at the end of the first quarter.

Pegasus’ resale of DirecTV’s service provided 96% of its $862.9 million in revenue last year.

Bloomberg News and Reuters were used in compiling this report.