FCC Move Cracks DBS Alliance

Washington— Stresses in the direct-broadcast satellite courtship of EchoStar Communications Corp. and DirecTV Inc. had been rumored for weeks. Last week, it became clear that a breakup is inevitable.

After the Federal Communications Commission last week refused to expedite a review of a new merger proposal between EchoStar and DirecTV parent Hughes Electronics Corp., the two companies issued statements indicating that at least one of them is ready to call off the transaction.

The conflicting statements emerged after the FCC said it would continue to seek public comment on the new proposal until Jan. 21, 2003 — the date on which Hughes may walk away from the deal and reportedly demand a $600 million check from EchoStar.

"EchoStar is willing to extend applicable termination dates in our contract to make allowances for the FCC comment period," said EchoStar spokesman Marc Lumpkin. "We will read the comments and respond accordingly."

Hughes, for the first time since Washington regulators effectively killed the deal in October, bluntly refused to accommodate its suitor.

"Both GM [Hughes parent General Motors Corp.] and Hughes are not waiving any provisions in the merger agreement," Hughes spokesman Richard Dore said.

Costly break-up

The question now is whether EchoStar chairman and CEO Charlie Ergen swallows hard and pays Hughes, or litigates in an effort to postpone an acquisition by someone else. Both Rupert Murdoch's News Corp. and John Malone's Liberty Media Corp. are considered likely bidders for DirecTV's 11 million subscribers — perhaps in a joint deal.

Under the terms of the merger agreement, EchoStar is also committed to paying $2.7 billion for 81 percent of PanAmSat Corp., owned by Hughes.

Carmel Group DBS analyst Jimmy Schaeffler predicted Hughes is likely to walk away from the deal on Jan. 21, and Ergen would avoid a court battle by negotiating new break-up terms.

"Charlie will buy PanAmSat and pay the break-up fee, but he will reduce the price by a substantial margin via some kind of negotiated settlement," Schaeffler said.

The FCC's refusal to hasten consideration of the new merger proposal fell into a familiar pattern.

On Oct. 10, the FCC rejected the deal to combine No. 1 DBS provider DirecTV with EchoStar, the second-largest company, which markets its services under the Dish Network brand. It said the transaction was anti-competitive because it would leave millions of households with access to just one DBS provider and reduce competition in the overall pay-TV market to an extent that its purported efficiencies could not offset.

The FCC promptly referred the merger to an internal administrative law judge — normally a death sentence for such a merger, because a contested ALJ case can take years to resolve.

On Oct. 31, a second blow was dealt when the Justice Department filed a federal lawsuit seeking to block the merger as an antitrust violation. U.S. Judge Ellen Segal Huvelle refused to grant an expedited trial.

Cablevision connection

The one remaining ray of hope was that the FCC gave the DBS firms 30 days to file an amended merger proposal.

Under the new plan submitted on Thanksgiving eve, EchoStar told the FCC it was prepared to divest assets and execute national and local resale programming agreements with Cablevision Systems Corp. in order to obtain merger approval. The Bethpage, N.Y.-based MSO owns a swath of DBS spectrum and has proposed a local and national service.

"This remedy is significantly broader than the proposal presented … to the Department of Justice" in October, EchoStar and Hughes said in the joint FCC filing.

In March, Cablevision plans to launch a DBS bird to provide local TV signals and an array of high-definition TV programming services.

To bolster Cablevision's entry, EchoStar effectively agreed to allow the cable operator, through transactions and assignments, to take control of the 148 degrees west longitude and 61.5 west longitude orbital locations, which can combine to serve all 50 states.

EchoStar would retain control of the three orbital slots that provide the most efficient DBS service.

A Cablevision spokesman declined to comment on the revised merger proposal.

EchoStar also guaranteed that it would sell one satellite and lease two others to Cablevision. And the plan called for sharing terrestrial facilities to reduce Cablevision's costs for provide local TV signals via satellite.

Under a broad marketing agreement, both EchoStar and Cablevision would be able to resell each other's "full product line," distributed from six orbital positions.

Further, EchoStar promised to give Cablevision a shot at subscribers who need new set-top boxes, and vowed to discuss ways to give Cablevision "open access" to retail distributors.

With these assets and guarantees, Cablevision's DBS service would be up and running quickly and represent a "more robust service that either EchoStar and DirecTV today," the DBS firms said.

But when the DBS firms filed their amended merger proposal, they told the FCC that because of the Jan. 21 deadline, "only expedited action can secure meaningful relief for the parties and for consumers."

In the notice, the FCC recounted its reason for rejecting the merger in October and enumerated changes to the merger proposed by the companies. But the agency did not indicate why it would keep the record open until Jan. 21.