DOJ to Ergen: Fuhgedaboudit!

Expect a fight over the terms of a divorce. That's the wide expectation of Wall Street and media executives now that the Department of Justice and 23 states have moved to block EchoStar Communications' planned takeover of DirecTV parent Hughes Electronics, saying it would decrease competition in the video market too drastically.

The move last week follows an earlier rejection on similar grounds by the Federal Communications Commission.

It is highly unlikely that the companies will engage in the 12- to 24-month fight it would take to get a reversal. This "officially, officially" puts an end to the merger's prospects, said Merrill Lynch media analyst Marc Nabi.

Among the big questions now are whether EchoStar Chairman Charlie Ergen will try to wriggle out of two elements of the deal: a $600 million breakup fee and the $2.7 billion purchase of 81% of international satellite operator PanAmSat.

Generally, if Hughes and its parent General Motors made "best efforts" to see the deal through and there are no material adverse financial changes in the companies, EchoStar is obliged to pay the breakup fee and take over PanAmSat. Last month, before the FCC rejection, Ergen said, "Absolutely, we will honor our contract." But he added, "There are certain circumstances where we would pay the breakup fee, circumstances where they would."

DirecTV was dancing with News Corp. before agreeing to sell to EchoStar and is widely expected to restart negotiations. But, with the stocks of all the players down so far, the deal could be much different from an EchoStar takeover. Nabi predicts that News Corp. will wind up buying not the whole company but GM's 30% stake in Hughes, plus AOL Time Warner's 6%.

The DOJ flatly rejected Ergen and DirecTV Chief Executive Eddy Hartenstein's central argument that combining the companies would strengthen DBS's ability to compete against cable.

Charles James, assistant attorney general in charge of the agency's antitrust division, said he's far more worried about shrinking the number of multichannel video providers in most markets from three—cable, EchoStar and DirecTV—to just two. And, in rural markets without cable, the number of competitors would go from two to just one. "We think consumers will be significantly injured by the lack of competition this deal would create," James said.

DOJ officials weren't very impressed with Ergen's Hail Mary pass: a deal to give spectrum and satellite facilities to Cablevision Systems, which proposes to launch another DBS service. James said the prospect of new competition had to be "timely, likely and sufficient" and the Cablevision plans don't cut it.

EchoStar Chairman Charles W. Ergen said in a statement, "We are obviously disappointed that, at this time, we have not been able to convince regulatory officials to share our vision. EchoStar will continue to explore all possible means to be allowed to compete against the cable giants."

Hughes said it will meet with EchoStar before deciding how to proceed.

The deal has a drop-dead date of Jan. 21, at which point DirecTV could scuttle the deal and demand its fee.

Ergen has moaned that neither EchoStar nor DirecTV can effectively compete against cable without more satellite spectrum, comparing the companies to cars driving toward a cliff. He will, no doubt, change his posture if the deal doesn't go through.