Ergen Has Eye on DirecTV

New York-EchoStar Communications Corp. chairman Charlie Ergen last week informally threw his hat into the ring as a possible candidate to merge with direct-broadcast satellite rival DirecTV Inc.

Although Ergen would not say if he is talking with DirecTV parent Hughes Electronics Corp. or a third party about a possible merger, he noted that the synergies from combining two national DBS platforms would be tremendous.

"There's no combination of companies that would bring better value" than DirecTV and EchoStar, Ergen told attendees last week at the SkyForum conference here.

"We seriously would look at some financial transactions and try to get a valuation and see if it would make sense," Ergen later told reporters.

In recent weeks, management at Hughes and its parent, General Motors Corp., have been vocal about their plans to decide on a possible sale, merger or spin-off of the Hughes assets "sooner rather than later."

At SkyForum here last Thursday, Hughes consumer sector corporate senior executive vice president Eddy Hartenstein said a decision was likely "within months, not years," but added that any speculation about specific partners or structuring would be "quite premature."

He said Hughes was talking with a number of companies, including some of its current strategic partners, but declined to name names.

PaineWebber analyst Thomas Eagan wrote in a report on Hughes last week that the Wall Street firm expects to see a transaction by year-end. At SkyForum, Eagan said EchoStar was unlikely to win a bid for Hughes, and that Ergen's aim may be to drive up the price.

At SkyForum, Eagan and other Wall Street analysts speculated about likely candidates for a Hughes merger or buyout.

SG Cowen managing director Cai Von Rumohr mentioned News Corp., Microsoft Corp. and The Walt Disney Co. as possible contenders. Others added Viacom Inc. and General Electric Co.'s NBC to the list.

"The big question is, 'What does General Motors want to do?'" Von Rumohr said. On a strategic basis, "the parts are worth more as a whole" than if the various Hughes divisions were sold separately or later divested, he added.

Von Rumohr predicted that "all the brightest minds in the world will be working on this deal."

Morgan Stanley Dean Witter principal Vijay Jayant said that GM could be seeking as much as $60 billion to sell off Hughes, and that no buyer would pay cash. "What GM wants is a currency that makes sense," he added. "I look at the old-fashioned John Malone structures as a template for this."

CIBC World Markets senior equity analyst Jeff Wlordarczak told SkyForum attendees that he'd count EchoStar among the players competing for Hughes.

Panel moderator Evie Haskell, vice president of Media Business Corp., said Ergen will at least "get in there and mix things up."

News Corp. has been named at the top of most observers' lists of likely bidders for Hughes. News has long looked to add a U.S. arm to its global satellite holdings. Its chief operating officer, Chase Carey, declined to comment on possible talks with Hughes, citing a pending IPO of its Sky Global division.

When asked last Thursday, Ergen would not rule out the possibility of a three-way deal between News, Hughes and EchoStar, although he admitted that merging the three management styles would raise complications. Ergen said he believed EchoStar's corporate culture was more closely matched to that of News than DirecTV's.

News chairman Rupert Murdoch maintained a "cordial" relationship with Ergen "even when we were suing him," Ergen noted.

Ergen said he would also not rule out the possibility of stepping down following such a DBS merger.

"I would consider anything that would benefit the shareholders," said Ergen, by far EchoStar's largest shareholder. "If there's anybody better to run this ship, let them come run it."

Any merger of the two DBS companies would face close scrutiny from government regulators concerned about placing so much control over national programming decisions into the hands of a single entity.

But Ergen noted that any company large enough to make a play for Hughes would also draw government inquiry.

Some of the Wall Street analysts at SkyForum last week said that large content companies couldn't afford to stay out of the race for the national programming distributor.

"We think there is a race to control the set-top box," Jayant said. "You can't remain a passive distributor of content."

It's not merely a question of carriage for programmers, he added. It's also one getting preferred channel positioning in the new interactive environment.

As recently as two years ago, industry watchers debated if there was room for three national DBS players. DirecTV and EchoStar ended up dividing up the spoils of the former PrimeStar Inc., with EchoStar winning the high-power spectrum from former PrimeStar partner News Corp. and DirecTV buying out the Prime-Star medium-power customer base. DirecTV plans to turn the PrimeStar signal off at the end of this week.

Ergen noted the tens of billions of dollars the DBS companies could save in satellite spectrum if the rivals did not have to send duplicate signals of popular cable networks. A combined company could also double the number of markets served with local broadcast signals.

And neither company would need to pay special incentives to national retailers in order to ensure exclusivity, Ergen added-a veiled reference to an antitrust suit EchoStar filed earlier this year against DirecTV.

The benefits of those cost savings would trickle down to consumers, Ergen predicted. "The result is there would probably not be a cable-rate increase for a long time," he said.

Besides the financial, regulatory and corporate-culture challenges a DBS merger would entail, a joined DirecTV and EchoStar platform would require a wholesale swap-out of consumer hardware. But Ergen said that the advantages of having a uniform DBS standard would outweigh the cost of the switch-out.