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Bid for Loral Could Crimp Ergen Rivals

EchoStar Communications Corp. made a $1.85 billion play for bankrupt Loral Space & Communications Ltd. last Wednesday, a move some saw as an effort by the direct-broadcast satellite giant to delay construction of at least one bird for rival DirecTV Inc.

EchoStar chairman and CEO Charlie Ergen had been considering a bid for months. The company sent a letter to Loral back in August to express its interest. At the time, a spokesman said EchoStar had not decided whether to actually make a bid.

EchoStar's offer is contending against an earlier bid by Intelsat Ltd. to acquire Loral's North American satellite assets for about $1.1 billion.

Intelsat had planned to buy the Loral assets — five operational satellites and one being constructed for DirecTV — but not the satellite-manufacturing operations.

Loral rejection

In documents filed with the U.S. Bankruptcy Court for the Southern District of New York last Wednesday, EchoStar called its all-cash bid for all of Loral the most appropriate disposition of the Loral assets.

"In an apparent violation of the debtors' duty of due care, the contemplated sale [to Intelsat] seems at best hasty and ill-conceived," EchoStar said in the court document.

In a statement issued last Wednesday, Loral rejected EchoStar's offer.

"EchoStar's bid undervalues Loral's businesses, especially in light of the significant increase in value that has been achieved since the beginning of the company's reorganization case in July," Loral chairman Bernard Schwartz said in a statement. "Our recent satellite awards demonstrate that Loral remains a trusted and valued business partner, providing the industry's most advanced and reliable satellites and satellite services.

"Further, we continue to believe that the best course of action for Loral to enhance the value of its assets is to proceed with the proposed sale of our North American satellites, and emerge from the bankruptcy process with a viable, ongoing satellite services and manufacturing business."

Four of the five operational satellites (Telstar 4, 5, 6 and 7) mainly carry television signals on a wholesale basis for major networks like ABC, CBS and Fox. The fifth, called EchoStar IX/Telstar13, launched in August and is jointly owned by EchoStar and Loral.

EchoStar operates the Ku-band payload of EchoStar IX/Telstar 13 to enhance its Dish Network DBS service and a Ka-band spot beam for broadband services. The C-band payload is owned and operated by Loral.

Loral lost contact with Telstar 4 last month, after a short circuit disrupted its operations, and stands to receive a $100 million windfall as a result, EchoStar said in the documents. EchoStar said that Telstar 4 is worth about $40 million and is insured for $140 million.

Some analysts saw the EchoStar bid as a possible move by Ergen to throw a wrench in Loral's plans to build new satellites for DirecTV and Intelsat.

In a research report, UBS Warburg cable and satellite analyst Bourkoff wrote that by launching a bid, "EchoStar could slow down or complicate manufacturing that is already under way," adding that if the bankruptcy court approves the EchoStar bid, it could force rival DBS companies to look to Europe to acquire future satellites.

Spectrum play

But Bourkoff added that the bid more likely is a serious attempt by EchoStar to gain more spectrum for future HDTV offerings.

"This is consistent with our thesis that as HDTV is offered on a more ubiquitous basis, both cable and satellite operators will need more capacity," Bourkoff wrote.

Lehman Bros. Inc. cable and satellite analyst Vijay Jayant called the late-inning EchoStar bid "questionable" in a research report, but added that the DBS giant could have three legitimate reasons for the purchase, including the ability to pick up the assets at a discount "while also becoming the satellite provider to a key competitor DirecTV."

According to the bankruptcy court documents, EchoStar made the $1.85 billion offer on Oct. 3. EchoStar has asked that the Oct. 15 deadline for an auction of Loral's assets be delayed until December, giving it enough time to look over Loral's books.

A hearing on the matter is scheduled for Oct. 22.